Agri 2312 chapter 17 exchange rates and agricultural trade

Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward

© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights

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Exchange Rates and

Agricultural Trade

Chapter 17



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Discussion Topics

Exchange rates and the foreign exchange market

The balance of paymentsThe international monetary systemExchange rate determinationExchange rates and U.S. agricultural

tradeConsiderations for policy coordination



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Exchange Rate DefinedThe exchange rate is the number of units of a foreign currency required to obtain one unit of a domestic currency.

The reciprocal of this rate expresses the number of units of a domestic currency required to obtain one unit of a foreign currency.

These rates can be thought of as the value of the domestic currency relative to a foreign currency (i.e., the value of the $ relative to the £ or ¥).

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When the value of thedollar appreciates invalue, the exchangerate index increases.A depreciation of thevalue of a dollar causesthe index to decline.

When the value of thedollar appreciates invalue, the exchangerate index increases.A depreciation of thevalue of a dollar causesthe index to decline.



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The line “Canadiandollar (in U.S. dollars)”of 1.305 means that aCanadian dollar exchangesfor almost $1.31 in U.S.currency. One BritishPound is worth about $1.82 in U.S. currency.

The line “Canadiandollar (in U.S. dollars)”of 1.305 means that aCanadian dollar exchangesfor almost $1.31 in U.S.currency. One BritishPound is worth about $1.82 in U.S. currency.



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Balance of PaymentsThe balance of payments (BOP) is made up of threemain accounts:

Current account: composed of merchandise tradeaccount (exports less imports), services trade account (income from international capital investments, tourism,transportation and insurance) and transfer payments(gifts and foreign aid).

Private capital account: summarizes transactions in realand financial assets and foreign activities of U.S. banks.

Official settlements account: summarizes net changes inofficial holdings of international reserve assets.

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The U.S. began running a current account deficit in the mid-1980sas a result of a growing merchandise trade deficit. Inflows of private capital were used to pay for this deficit.

The U.S. began running a current account deficit in the mid-1980sas a result of a growing merchandise trade deficit. Inflows of private capital were used to pay for this deficit.

Private capital accountPrivate capital account

Current accountCurrent account



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Only 25 countries, including the U.S., Japan and Canada allow theircurrencies to float independently. Most countries peg or “fix” theirCurrency relative to another currency, basket of currencies or SDRs.

Only 25 countries, including the U.S., Japan and Canada allow theircurrencies to float independently. Most countries peg or “fix” theirCurrency relative to another currency, basket of currencies or SDRs.



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Rates are determined byforces affecting the supplyand demand for currencieson the foreign exchangemarket.

Rates are determined byforces affecting the supplyand demand for currencieson the foreign exchangemarket.



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An increase in the demand for dollars as U.S. interestrates rise, indicating here that it takes 4 euros to buya dollar rather than 3 euros.

An increase in the demand for dollars as U.S. interestrates rise, indicating here that it takes 4 euros to buya dollar rather than 3 euros.

E 5

E 4

E 3

E 2

E 1Exc

han

ge

rate

(Eu

ros/

do

llars

)



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A trade deficit causes an increase in the supply of dollarson currency markets, thereby weakening the dollar andlowering the exchange rate from 3 euros per dollar to 2 euros

A trade deficit causes an increase in the supply of dollarson currency markets, thereby weakening the dollar andlowering the exchange rate from 3 euros per dollar to 2 euros

Exc

han

ge

rate

(Eu

ros/

do

llars

)



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When the dollar rises, exportsfall, and when the dollardeclines, exports rise.

When the dollar rises, exportsfall, and when the dollardeclines, exports rise.



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An increase in the value of the dollar makesOur exports more expensive to client nations.

An increase in the value of the dollar makesOur exports more expensive to client nations.



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SummaryExchange rates have an impact on U.S. agricultural trade.The value of foreign currencies is determined in the

foreign exchange market.Balance of payments is a link between international trade,

capital flows and exchange rates.The international monetary system is called a managed

float, where rates fluctuate within limits controlled by the International Monetary Fund or IMF.



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Chapter 18 discusses the reasons why nations trade….

Economy & Finance

Agri 2312 chapter 17 exchange rates and agricultural trade