Chapter 15

Ten Important Points to Remember about International Finance

In This Chapter

arrow Taking a look at important international finance details

arrow Noting points that are worth remembering

This chapter reminds you of some important points in international finance. Many chapters in this book explain these points in detail; here you find short reminders.

Catching Up on What a Relative Price Is

As Chapter 2 indicates, an exchange rate (at least, the nominal exchange rate) is nothing but a relative price of one currency in terms of another one. In terms of apples and oranges, the relative price of oranges in terms of apples implies the number of apples that you have to give up to buy one orange. Similarly, the dollar–euro exchange rate indicates the number of dollars necessary to buy one euro. If the dollar–euro exchange rate is $0.95, this is the price of the euro in dollars. You give up $0.95 to buy one euro.

Finding Out What Makes a Currency Depreciate

Theories of exchange rate determination (Chapters 5, 6, and 7) provide a set of nominal and real variables that affect the exchange rate. In terms of nominal variables, higher growth in the money supply, higher inflation rates, and higher nominal interest rates lead to the depreciation of a currency. In terms of real variables, most ...

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