LECTURE: AL MUIZZUDDIN F., SE., ME.

NILAI TUKAR DAN NERACA PEMBAYARAN

The currency of one country is exchanged for the
currency of another in the foreign exchange market.
The foreign exchange market is made up of thousands
of peopleimporters and exporters, banks,
international investors and speculators, international
travelers, and specialist traders called foreign exchange
brokers.
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An exchange rate is the price at which one currency
exchanges for another currency in the foreign
exchange market.
A rise in the exchange rate is called an appreciation of
the dollar, and a fall in the exchange rate is called a
depreciation of the dollar.

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For example, when the exchange rate rises from 84 yen to
100 yen per dollar, the dollar appreciates, and when
the exchange rate falls from 100 yen to 84 yen per
dollar, the dollar depreciates.
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Foreign Exchange
Market
Demand
The exchange rate
World demand for
U.S. exports
Interest rates in the
United States and
other countries
The expected future
exchange rate
Supply
The exchange rate
U.S. demand for
imports
Interest rates in the
United States and
other countries
The expected future
exchange rate
People buy U.S. dollars in the foreign exchange market
so that they can buy U.S.-produced goods and
servicesU.S. exports.
They also buy U.S. dollars so that they can buy U.S.
assets such as bonds, stocks, businesses, and real
estate or so that they can keep part of their money
holding in a U.S. dollar bank account.
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Exports effect
The larger the value of U.S. exports, the larger is the quantity
of U.S. dollars demanded in the foreign exchange market.
Expected profit effect
The larger the expected profit from holding U.S. dollars, the
greater is the quantity of U.S. dollars demanded in the foreign
exchange market.
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People sell U.S. dollars and buy other currencies so
that they can buy foreign-produced goods and
services U.S. imports.
People also sell U.S. dollars and buy foreign currencies
so that they can buy foreign assets such as bonds,
stocks, businesses, and real estate or so that they can
hold part of their money in bank deposits
denominated in a foreign currency.
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Imports effect
The larger the value of U.S. imports, the larger is the quantity
of U.S. dollars supplied in the foreign exchange market.
Expected profit effect
This effect works just like that on the demand for the U.S.
dollar but in the opposite direction.
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Changes in the Demand for U.S. Dollars
World demand for U.S. exports
U.S. interest rate relative to the foreign interest rate
The expected future exchange rate
Changes in the Supply of U.S. Dollars
U.S. demand for imports
U.S. interest rate relative to the foreign interest rate
The expected future exchange rate
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Flexible exchange rate
is an exchange rate that is determined by demand and supply in the
foreign exchange market with no direct intervention by the central
bank.
Fixed exchange rate
is an exchange rate that is determined by a decision of the
government or the central bank and is achieved by central bank
intervention in the foreign exchange market to block the
unregulated forces of demand and supply.
Crawling peg
is an exchange rate that follows a path determined by a decision of
the government or the central bank and is achieved in a similar way
to a fixed exchange rate by central bank intervention in the foreign
exchange market.
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You now know how the exchange rate is determined,
but what is the effect of the exchange rate? How does
currency depreciation or currency appreciation
influence our international trade and payments?
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balance of payments
accounts
1. Current account
records receipts from exports of goods and services sold abroad,
payments for imports of goods and services from abroad, net
interest income paid abroad, and net transfers abroad (such as
foreign aid payments).
2. Capital and financial account
records foreign investment in the United States minus U.S.
Investment abroad.
3. Official settlements account
records the change in U.S. official reserves, which are the
governments holdings of foreign currency. If U.S. official reserves
increase, the official settlements account balance is negative.
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