CHAPTER 10

FOREIGN
EXCHANGE
Group 6 :
Pangau, Timotius Vincent
Winantisan, Fabrizio Jeremy
Rangingisan, Gabriel Cloudio
Potangkuman Fernando
Suebu, Jein Nita Gledis
Luas, Veronica
Paendong, Brandon
 Introduction
• Foreign exchange
• The use of foreign exchange

Pangau, Timotius Vincent

 LO 10.1
Distinguish real
and nominal
exchange rate.
Pangau, Timotius Vincent
 The Nominal Exchange Rate
Nominal exchange rate is the rate at which one
can exchange the currency of one country for the
currency of another country.
The decline in the value of one currency relative
to another is called a depreciation of the
currency that is falling in value
The rise in the value of one currency relative to
another is called an appreciation of the currency
that is rising in value
Pangau, Timotius Vincent
Pangau, Timotius Vincent
 The Real Exchange Rate
Real exchange rate is the rate at which
one can exchange the goods and
services from one country for the goods
and services from another country.

Potangkuman, Fernando
Potangkuman, Fernando
 LO 10.2
Exc ha nge
r a t e s i n t he
Long Run .
Suebu, Jein Nita
Explain how :

- Prices affect exchange rates in the long

run.

- Inflation affect exchange rates in the

long run.
Suebu, Jein Nita
 The Law of One Price
Dasar:
Konsep arbitrase — gagasan bahwa produk yang
identik harus dijual dengan harga yang sama.
Diperluas dari instrumen keuangan ke barang
dan jasa :
Bahwa barang dan jasa yang identik harus dijual
dengan harga yang sama terlepas dari tempat
penjualannya.
Suebu, Jein Nita
 CONTOH 1
• Jika televisi model tertentu lebih murah
di St. Louis daripada di Philadelphia,
seseorang dapat membelinya di St.
Louis, berkendara ke Philadelphia, dan
menjualnya dengan untung.
Sehingga,

- St.Louis : price is low, increasing demand.

- Philadelphia : price is high, increasing supply.

Suebu, Jein Nita

 CONTOH 2
• Jika sebuah TV berharga $500 di
Amerika Serikat, dengan nilai
tukar nominal 1,38 dolar Kanada
per dolar AS.

• (Dolar AS) x (dolar Kanada/Dolar

AS) = Dolar Kanada.
(500 × 1,38) = 690 dolar Kanada
Suebu, Jein Nita
Suebu, Jein Nita
 Bagaimana harga
mempengaruhi nilai
tukar dalam jangka
panjang?

Suebu, Jein Nita

 Biaya
Transportasi
Tarif
Pajak
Spesifikasi
Teknis bisa
Selera
berubah
Berbeda di
Setiap Negara
Suebu, Jein Nita
 Purchasing Power Parity
Implies that the real exchange
rate is always equal to one

Rangingisan Gabriel Cloudio

 Example:

$1 Rp. 15,000 10 SGD

Rangingisan Gabriel Cloudio

 Example:

$1 Rp. 15.000 10
SGD
Basket of Goods

Rp.30,000 = $2

Rangingisan Gabriel Cloudio

 Nominal Exchange Rate:
10 SGD = Rp.15,000
Demand Overvalued
Basket of Goods
Rp. 30,000
Rp. 40,000

Demand Undervalue
d
Doesn’t reflect Purchasing Power Parity (PPP)
20 SGD
= Rp. 30,000
Rangingisan Gabriel Cloudio
 Basket of Goods
Demand
Overvalued
Rp. 30,000
Rp. 40,000

SGD $23.3 / Rp.35,000

Reflect Purchasing Undervalued

Power Parity (PPP) Demand 20 SGD
Rp. 30,000
Rangingisan Gabriel Cloudio
 Measuring the GDP with PPP
US Singapore

GDP $16 $18

Big Mac $2 $6
Basket of Goods $8 $3
GDP at PPP $16 $6
Rangingisan Gabriel Cloudio
If inflation occurs in one
country but not in another,
the change in prices creates
an international inflation
differential.

So, purchasing power parity

tells us that changes in
exchange rates are tied to
differences in inflation from
one country to another.

Specifically, the currency of a

country with high inflation will
depreciate.

Rangingisan Gabriel Cloudio

 LO 10.3
Analyze the supply
of and demand for
currencies to
explain exchange
rates in the Short
Run
Paendong,
Exchange Rate in Short Run

The Supply of Dollars

The supply of dollars didasarkan
pada keinginan warga AS untuk
membeli barang dan jasa dari
negara lain.
Paendong,
Paendong,
The Demand for Dollars

Ketika A.S. mengekspor produk atau

jasa, itu menciptakan permintaan
dolar karena pelanggan perlu
membayar barang dan jasa dalam
dolar.
Paendong,
Shifts in the Supply of and Demand for Dollars
A rise in the supply of dollars
Americans use to purchase
foreign good and services can be
caused by :
1. An increase in Americans
preference for foreign goods
2. An increase in the real interest
rate on foreign bonds
3. A decrease in the riskiness of
foreign investments relative to
U.S. investments
4. An expected depreciation of the
dollar

Winantisan, Fabrizio
Equilibrium in the Market for Dollars

Winantisan, Fabrizio
 Explaining Exchange rate movements

The supply and demand model of the

determination of exchange rates helps to
explain short-run movements in currency
values. Increasing the equilibrium exchange
rate and making dollars more valuable
Pangau, Timotius Vincent
Pangau, Timotius Vincent
 LO 10.4
Discuss
government
intervention in
foreign exchange
Luas, Veronica
markets.
 The more a country relies on
exports and imports, the
more important its exchange
rate.

Luas, Veronica
 SHIFT IN FOREIGN

VS

DOMESTIC PRICES
Luas, Veronica
 GOVERNMENT
INTERVENES IN THE
FOREIGN EXCHANGE
MARKET.

Luas, Veronica
 1. MAKE A PUBLIC
STATEMENT.

2. GOVERNMENT
BUYS OR SELLS
CURRENCY.

Luas, Veronica
 In the latter half of the 1990s, the Japanese economy was
stagnant; real GDP grew at a rate of about 1 percent.

Does the depreciation of the yen help?

In late May 2002, Japan’s Ministry of Finance sold yen in

exchange for dollars, hoping to drive down the price by
increasing the supply of yen.

Luas, Veronica
 Why did the Japanese government’s policy fail?
Shouldn’t an increase in the supply of yen,
regardless of where it comes from, lead to a
depreciation?

Luas, Veronica
 Foreign exchange intervention
will not be effective unless it is
accompanied by changes in
policy interest rates.

Luas, Veronica
 Thank
You.
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