QUIZ

• Differentiate between absolute advantage and

comparative advantage.
• Discuss the pros and cons of protectionism and
free trade
• What are trade barriers? Give examples.
• Describe any two of the following organizations
– GATT
– WTO
– ASEAN
– EU
– NAFTA
FOREIGN EXCHANGE MARKET
 Foreign Exchange Market
• A foreign exchange market is a market in which
foreign currencies are exchanged and relative currency
prices are established.
• An exchange rate is the rate at which one currency
trades for another.
• Buyers and sellers interacting in international markets
will exchange currencies through the foreign
exchange market.
• In the market for foreign currency, the intersection of
the demand for foreign currency and the supply of
foreign currency determine the exchange rate.
LO: 12-3

12-3
 Market for Foreign Currency
(Pounds)
P
Sl Depreciation is a
Exchange decrease in the value
Dollar Price of 1 Pound

$3
Rate: $2 = £1 of a currency relative
Dollar to another currency.
Depreciates
(Pound
Appreciates)

$2 Appreciation is an
Dollar
Appreciates
(Pound
increase in the value
Depreciates) of a currency relative
$1 to another currency.

Dl
0 Ql Q
LO: 12-3 Quantity of Pounds

12-4
 Determinants of Exchange
Rates
• Factors that cause a country’s currency to
appreciate or depreciate are:
– Tastes
– Relative Income
– Relative Price Levels
– Relative Interest Rates
– Speculation

LO: 12-3

12-5
 Money of a country is its symbol and identity
 USA= dollar ($)
 Germany= Deutschmark (DM)
 Great Britain= British Pound (α)
 Japan= Yen (Y)
 European Union= Euro (€)
• Price of one currency expressed in terms
of another currency
• Determined by market forces of demand
and supply
>> FLOATING RATE
• Unless interfered by BSP
>> PEGGED
• INCREASE IN EXCHANGE RATE $ TO
PHP
–DOLLAR APPRECIATED
–PESO DEPRECIATED ( ALSO CALLED
DEVALUATION)
• OVER VALUED BSP RATE < MARKET
RATE
• UNDERVALUED BSP RATE > MARKET
RATE
• Relative income changes
• Relative price changes
• Relative interest rates
• Other factors ( colonial mentality)
• PEGGED EXCHANGE RATE
– BSP buys and sells dollars to maintain a certain
exchange rate

• Free- floating or flexible exchange rate

– Price or exchange rate is determined by market forces
of demand and supply

• Managed floating exchange rate

– BSP interferes during disorderly or erratic fluctuations
of exchange rates
• CLEAN FLOAT= interferences only due
to erratic rates

• DIRTY FLOAT=Interference to achieve

objectives other than erratic rates
• FOREIGN EXCHANGE TRADING
CENTER
• BLACK MARKET
 • Internal economic
• External economic disturbance
disturbance • Open economy ( big
• Big exports Imports)
• Product diversification
• Similar rate of
inflation with trading
partner
• High reserves
• Inelastic demand or
supply
FLOATING PEGGED
• Business uncertainties
• Fluctuations in commodity prices
• Condition for IMF loan
• Cost push inflation
• Increase in foreign debt
• Decline in investments
• Dollar exchange control
• Selective imports
• Tight credit policy
• Sound fiscal policies ( expenditures, taxes
, balanced budget
• Fixed exchange rate ( no speculations)
1. $ exchange rate from PhP 50 to PhP 47
means Peso has appreciated. True or
false. Explain your answer.
2. If the market value of the peso to the
dollar is PhP47 but the BSP pegged the
exchange rate at PhP 43 means the
peso is over valued. True or false.
Explain your answer.