Question

The U.S. dollar price of a Swedish krona changes from \(\$ .1572\) to \(\$ .1730\). a. Has the dollar depreciated or appreciated against the krona? b. Has the krona appreciated or depreciated against the dollar? Use the information in the following table on Mexico's 2007 international transactions to answer exercises 4-6 (the amounts are the U.S. dollar values in millions): \begin{tabular}{lr} \hline Merchandise exports & \(\$ 271,594\) \\ Merchandise imports & \(\$ 281,649\) \\ Services exports & \(\$ 17,512\) \\ Services imports & \(\$ 23,784\) \\ Income receipts & \(\$ 7,972\) \\ Income payments & \(\$ 26,036\) \\ Unilateral transfers & \(\$ 24,197\) \\ \hline \end{tabular}

Short answer

Answer: The U.S. dollar has depreciated against the Swedish krona, and the Swedish krona has appreciated against the U.S. dollar.

Step-by-step solution

Identify the initial and final exchange rates

In the given situation, the initial exchange rate of the U.S. dollar to Swedish krona is \(\$ .1572\) and the final exchange rate is \(\$ .1730\).

Compare the initial and final exchange rates of the U.S. dollar to Swedish krona

We can observe that the final exchange rate (\(\$ .1730\)) is greater than the initial exchange rate (\(\$ .1572\)). This means that the U.S. dollar now buys fewer Swedish krona compared to the initial exchange rate.

Determine if the U.S. dollar has appreciated or depreciated against the Swedish krona

Since in the final exchange rate, the U.S. dollar buys fewer Swedish krona than before, we can conclude that the U.S. dollar has depreciated against the Swedish krona. Answer for part a: The U.S. dollar has depreciated against the Swedish krona.

Compare the initial and final exchange rates of the Swedish krona to the U.S. dollar

In this step, we will invert the initial and final exchange rates to get the exchange rate of the Swedish krona to U.S. dollar. Initial exchange rate=\(\frac{1}{\$ .1572} \approx 6.36 \text{ SEK/USD}\) and final exchange rate=\(\frac{1}{\$ .1730}\approx 5.78 \text{ SEK/USD}\). We can observe that the final exchange rate (5.78 SEK/USD) is less than the initial exchange rate (6.36 SEK/USD). This means that the Swedish krona now buys more U.S. dollars compared to the initial exchange rate.

Determine if the Swedish krona has appreciated or depreciated against the U.S. dollar

Since in the final exchange rate, the Swedish krona buys more U.S. dollars than before, we can conclude that the Swedish krona has appreciated against the U.S. dollar. Answer for part b: The Swedish krona has appreciated against the U.S. dollar.

Key concepts

Currency Appreciation and Depreciation

Understanding the concepts of currency appreciation and depreciation is crucial for navigating the complex world of international finance. When a currency is said to appreciate, it increases in value relative to another currency. Conversely, depreciation means the currency has lost value against another. This impacts not only international travel and investments but also the broader economy, including import and export activities.

The exercise provided illustrates this concept by comparing exchange rates over time. When the U.S. dollar price of the Swedish krona increased from \(0.1572\) to \(0.1730\), each dollar could buy fewer krona than before. As a result, the U.S. dollar has depreciated. Meanwhile, because the initial exchange rate allowed for more dollars to be bought with a single krona than the final rate, the Swedish krona has appreciated against the dollar.

Impact of Currency Movements

Currency values fluctuate regularly, and these movements can have significant impacts. For instance, if the U.S. dollar depreciates against the krona, American products become cheaper for Swedes, potentially increasing exports. However, the same fluctuation might make Swedish goods more expensive in the U.S., potentially reducing American imports from Sweden.

International Transactions

The interactions of countries through the trade of goods, services, and financial assets constitute international transactions. These transactions are meticulously recorded in a country's balance of payments, which tallies the money flowing into and out of a country.

Let's delve into the table provided in the exercise, which summarized Mexico's international transactions for 2007. The values shown for exports and imports of merchandise and services, alongside the income receipts and payments, are pivotal details. They showcase Mexico's economic interactions on a global scale, revealing a snapshot of the country’s trade performance and financial health.

Trade Balance and Services

By examining the merchandise exports and imports, we can derive the trade balance. A positive balance implies more exports than imports, bolstering a nation's currency value through increased demand. Conversely, a negative balance can signal economic challenges and may lead to currency depreciation. Additionally, the exchange of services and income transactions play an essential role in determining a country's overall financial position.

Exchange Rate Determination

The exchange rate is the price of one currency in terms of another and is determined by various market forces. Key factors influencing exchange rates include interest rates, inflation, and the overall economic performance of a country.

When a country’s interest rates rise, its currency often appreciates because higher interest rates offer better returns to investors, increasing demand for that currency. Conversely, high inflation typically depreciates a currency because purchasing power erodes, leading investors to seek more stable currencies.

Interplay of Economic Indicators

These indicators are intertwined; for instance, strong economic growth might lead to higher interest rates to control inflation, subsequently affecting the currency value. The exercise demonstrates that different exchange rates between two points in time reflect the interplay of these economic factors. Understanding that these rates are not static but react dynamically to both domestic and international economic events is crucial for grasping exchange rate economics.