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# Determinants of exchange rates watch

1. How does foreign trade affect exchange rate??

My book says increased demand for imports(for the UK) would increase the supply of pounds, causing a fall in exchange rate?

How would it lead to an increased supply of pounds if it's being traded into other currencies to buy the imports?
2. Foreign trade will affect it due to the demand for a good or service within an economy. For example, if the UK's exports are cheaper than the American exports, more people will covert their current into the pound, in order to purchase our exports. They must do this in order to buy from a British seller, as we don't really accept other currencies. As a result of this, demand for the pound will increase, therefore using a simple demand and supply curve, demand will shift right, and the price mechanism will cause the price of the pound to go up (Value of the pound against the US dollar). Due to this, the exchange rate will decrease from any currency to the pound ( Exchange rate is essentially the cost of one currency in terms of another), therefore you will receive less pounds for every dollar exchanged. I would recommend you drawing a graph of \$:£ against quantity of currency, with a unitary demand and supply curve. Add an increase in demand curve to represent increased demand for the pound. You'll see demand causes for an increase in this ratio, therefore imagine the diagram to represent more dollars per pound as the price axis value rises, against a unit pound value of 1.
3. If you import more, you would convert more pounds into the foreign currency, meaning pounds would be more scarce right?
4. Don't want to confuse you on the \$:£ ratio. What I am saying, is that more demand will mean that less pounds can be bought per dollar as each pound has become more valuable (Appreciated). Therefore you can buy more dollars with one single pound.
5. Nearly, but actually as a result there are more pounds. When looking at exchange rates you look at it always from the perspective of the exchange bureau.

Thus if you are converting pounds into a foreign currency, you demand from the currency exchange bureau more of the foreign currency and supply them with more pounds. Thus there are more pounds available for other people to buy in the currency markets, thus supply of pounds has increased.
6. (Original post by jsk800)
Foreign trade will affect it due to the demand for a good or service within an economy. For example, if the UK's exports are cheaper than the American exports, more people will covert their current into the pound, in order to purchase our exports. They must do this in order to buy from a British seller, as we don't really accept other currencies. As a result of this, demand for the pound will increase, therefore using a simple demand and supply curve, demand will shift right, and the price mechanism will cause the price of the pound to go up (Value of the pound against the US dollar). Due to this, the exchange rate will decrease from any currency to the pound ( Exchange rate is essentially the cost of one currency in terms of another), therefore you will receive less pounds for every dollar exchanged. I would recommend you drawing a graph of \$:£ against quantity of currency, with a unitary demand and supply curve. Add an increase in demand curve to represent increased demand for the pound. You'll see demand causes for an increase in this ratio, therefore imagine the diagram to represent more dollars per pound as the price axis value rises, against a unit pound value of 1.
So to confirm, if UK import more goods from the USA, the demand for US dollars increase, lowering the UK exchange rate in terms of US dollars?
7. (Original post by TheGuy264)
Nearly, but actually as a result there are more pounds. When looking at exchange rates you look at it always from the perspective of the exchange bureau.

Thus if you are converting pounds into a foreign currency, you demand from the currency exchange bureau more of the foreign currency and supply them with more pounds. Thus there are more pounds available for other people to buy in the currency markets, thus supply of pounds has increased.
Ohh right thank you. To summarise, are you saying that you're basically giving foreign countries more pounds when you exchange currencies?
8. (Original post by dont know it)
Ohh right thank you. To summarise, are you saying that you're basically giving foreign countries more pounds when you exchange currencies?
Not necessarily to foreign countries. You can have trade deals between firms in different countries where they pay the currency directly to the other, but, assuming you're asking this from an economics perspective, again look at it from the perspective of the currency exchange bureau (the place where you swap currencies).

The reason we do this is because this is the 'market' for currencies. This is where you buy and sell all currencies, thus this is where supply and demand will affect prices.

When you give your currency to them, you are increasing the supply of the currency. When you take a certain currency from them, you are increasing the demand/ limited supply of that currency.

E.g. if I buy some lovely french wine, by converting my pounds to euros, I give my pounds to the exchange (increasing supply of pounds), and demand my euros (increasing demand for euros) and then use these euros to pay the French wine supplier.
9. (Original post by TheGuy264)
Not necessarily to foreign countries. You can have trade deals between firms in different countries where they pay the currency directly to the other, but, assuming you're asking this from an economics perspective, again look at it from the perspective of the currency exchange bureau (the place where you swap currencies).

The reason we do this is because this is the 'market' for currencies. This is where you buy and sell all currencies, thus this is where supply and demand will affect prices.

When you give your currency to them, you are increasing the supply of the currency. When you take a certain currency from them, you are increasing the demand/ limited supply of that currency.

E.g. if I buy some lovely french wine, by converting my pounds to euros, I give my pounds to the exchange (increasing supply of pounds), and demand my euros (increasing demand for euros) and then use these euros to pay the French wine supplier.
Thanks! Got it now.
10. Yes that is the case. For the UK however, this will mean that AD decreases ceteris paribus, as an increased imports is a negative factor, influencing AD. You should take a look at the J-curve and marshall lerner effect to see how this is not exactly bad for the UK in the long-run.
11. I've merged your two threads together. In future, please don't make more than one thread as it splits replies and pushes down the threads of others unnecessarily

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