Exchange Rates and Agricultural Trade

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Exchange Rates and Agricultural Trade

• Chapter 20

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When the value of the dollar appreciates
in value, the exchange rate index increases. A
depreciation of the value of a dollar causes the
index to decline.
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The line Canadian dollar (in U.S. dollars) of
0.726 means that a Canadian dollar exchanges for
only 72.6 cents in U.S. currency. One
British pound, on the other hand, is worth 1.68
in U.S. currency.
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Balance of Payments
The balance of payments (BOP) is made up of
three main accounts Current account composed
of merchandise trade account (exports less
imports), services trade account (income from
international capital investments,
tourism, transportation and insurance) and
transfer payments (gifts and foreign
aid). Private capital account summarizes
transactions in real and financial assets and
foreign activities of U.S. banks. Official
settlements account summarizes net changes
in official holdings of international reserve
assets.
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The U.S. began running a current account deficit
in the mid-1980s as a result of a growing
merchandise trade deficit. Inflows of private
capital were used to pay for this deficit.
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Only 48 countries, including the U.S., Japan and
Canada allow their currencies to float
independently. Most countries peg or fix
their Currency relative to another currency,
basket of currencies or SDRs.
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Rates are determined by forces affecting the
supply and demand for currencies on the foreign
exchange market.
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An increase in the demand for dollars as U.S.
interest rates rise, indicating here that it
takes 4 German marks to buy a dollar rather than
3 marks.
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A trade deficit causes an increase in the supply
of dollars on currency markets, thereby weakening
the dollar and lowering the exchange rate from 3
marks per dollar to 2 marks
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When the dollar rises, exports fall, and when the
dollar declines, exports rise.
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