Professional Documents
Culture Documents
The Foreign-Exchange
Market and
Exchange Rates
Why do we care about exchange rate
markets?
DEXr/EXr= DEX/EX+DP/P-DPf/Pf
Let us take our previous example and say that
that shirts cost more in the US- (now they are
$15). The RER is now
• (Rs.50/$1 )*($15)/Rs.250=3 Indian Shirts/1
U.S Shirt
• The change in EX=0, in P=50% in Pf=0
• Change in EXr=50%
Foreign-Exchange Markets
-$60,000 60
Trade Weighted Exchange Index: 50
-$65,000 Major Currencies
40
-$70,000 (Right Scale: 2000=100) Trade Deficit (Dollars) 30
-$75,000 20
1/1/04
2/1/04
3/1/04
4/1/04
5/1/04
6/1/04
7/1/04
8/1/04
9/1/04
10/1/04
11/1/04
12/1/04
1/1/05
2/1/05
3/1/05
4/1/05
5/1/05
6/1/05
7/1/05
8/1/05
9/1/05
10/1/05
11/1/05
12/1/05
1/1/06
2/1/06
3/1/06
4/1/06
5/1/06
6/1/06
7/1/06
8/1/06
9/1/06
$600,000
$400,000
$300,000
$200,000
$100,000
$0
2000:I 2000:III 2001:I 2001:III 2002:I 2002:III 2003:I 2003:III 2004:I 2004:III 2005:I 2005:III 2006:I
Determining Short-run
Exchange Rates