International Money and Business summary 2023

What determines foreign exchange rates? - -Foreign Exchange Rate: price of one currency such as the dollar in terms of another, such as the euro. Appreciation: increase in the value of the currency Depreciation: Is a loss in the value of the currency When US sells to China, they demand to be paid in US dollars; easiest way to get US dollars is to export to USA where they will pay in dollars. Dollars are very sought after; 80% of foreign exchange is in $. -Relative Price Differences and Purchasing Power Pariety - -Some countries expensive (Switzerland) Some countries have cheap prices (Philippines) Prices affect exchange rates through the PPP. "law of one price" PPP = In the absence of trade barriers, the price for identical products sold in different countries must be the same. Otherwise traders would buy low and sell high; pushing prices to be identical around the world. Exchange rates should move to levels that would equalize prices around the world. -Big Mac Index - -According to PPP, a Big Mac should cost the same around the world; but it does not. American's pay double the price of a big mac in China. Confirms that prices in some European countries are very expensive Nontraded inputs are cheaper in emerging economies (labor, real estate) Traded inputs are the same across the world (flour, beef)