How the exchange rate has been affected over the last 3 years

Authors Avatar

Exchange Rates

Matt Cantatore

Contents

Intro        2

How the exchange rate has been

affected over the last 3 years        2

       

       Imports and Exports        3

       

       World Commodity Prices        4

     

       Level of Economic Activity        5

     

       Australia’s Inflation Rate        6

Intro

In the world economy, every single country has its own currency which is used as legal tender for all domestic transactions. One cannot purchase a good in one country, with the currency of another. This is to say, that if we as Australians wish to purchase a good or service in Britain, we must pay in Pound Sterling – the Australian Dollar (AUD) would not be accepted. Therefore, the need to devise a conversion policy between currencies has arisen – to date, this conversion rate is known as the exchange rate. An exchange rate merely expresses the purchasing power of one currency in relation to another (for example, 1 AUD is worth 0.66 USD).  (Alcorn 2003)

How the exchange rate has been affected over the last 3 years

As already mentioned, an exchange rate measures the purchasing power of a domestic currency. But how would one determine the exchange rate of a currency? What factors would affect it, causing it to either increase or decrease? (CHASS *)

It might help to think of the AUD as a "good". With one Australia good one can purchase 2/3 of a US "good". Now like all goods, suppose there is a market for this Australian "good". On this market one will find different types of "goods" e.g. US goods(dollars), Mexican goods(Pesos), German goods(Deutschmarks), British goods(Pound Sterling) and Japanese goods(Yen), to name a few. Like all other goods, when demand for a good is high its price rises. To recall simple demand and supply curves, when demand is high, the demand curve shifts to the right (i.e. greater demand) and this movement drives up prices. Similarly, when the demand curve shifts to the left (i.e. less demand) this movement lowers prices. (CHASS)

Join now!

* Year unknown

One can explain movements in the international currency market in much the same way. When demand for an Australian good increases the price of the good rises. Here the "good" is the Australian dollar and the price of the good is its exchange rate. (CHASS)

 As demand for Australian dollars increases, the price of Australian dollars rises. Since the price can be viewed as the exchange rate we can thus say that, as the demand for Australian dollars rises the exchange rate increases. An increase in the exchange rate is also called an appreciation of the ...

This is a preview of the whole essay