Exchange Rates

Students describe and identify where certain items they own come from and the approximate price of these items. They learn that to purchase an imported item they have to pay the people from whom they bought the item in their country’s currency. Moreover, if they want to travel to another country, they have to pay for the goods and services they buy in that country’s currency. Students calculate foreign exchange rates and derive an equation to convert prices for goods in one country’s currency compared with another.

The student will be able to:

• Create an equation to determine the equivalent amount of one currency with the specific amount of another currency (e.g., determining how many Mexican pesos it takes to purchase a US dollar, which we will abbreviate to USD).
• Calculate the price of traded goods and services using currency exchange rates.
• Analyze the effect of an appreciated or depreciated currency on the price of goods and services in a country.

• Activity 1, My Stuff Was Made Where?, one copy per student and a copy for the teacher
• Activity 2, Calculating Exchange Rates, one copy per student
• Visual 1: My Stuff Was Made Where?
• Activity 3, Country of Origin Cards, one copy cut apart
• Activity 4, Exchange Rate Interactive Recording Sheet, one per pair of students
• One basic calculator for each student
• One computer for every two students with internet access

When purchasing goods and services from or in a foreign country, people typically must pay in that country’s currency. To do that, people exchange one currency for another at a specific exchange rate. Exchange rates are determined in foreign exchange markets where individuals, firms, and countries around the world can buy and sell currency. The interactions of these buyers and sellers (or more specifically the demand for and supply of a currency) determine the value of a particular currency compared with another.

The fluctuations in exchange rates play a key role in determining the purchasing power of individuals, such as tourists in a foreign country. An increase in the value of a currency is good news for importers; they can buy more goods for a dollar. However, that same change is bad news for exporters;  their goods are now more expensive for foreigners to buy.  A decrease in the value of a currency is bad news for importers; they can buy fewer goods for a dollar. However, that same change is good news for exporters; their goods are now less expensive for foreigners to buy.

Understanding how to calculate exchange rates and analyze the effects of an appreciating or depreciating currency increases awareness regarding the price of goods and services.

technology.councilforeconed.org/exchange-rates/

https://www.preview2.econedlink.org/resources/

1. Distribute a copy of Activity 1 to each student. Ask students to look through their belongings (even tags on their clothing). Using Activity 1, ask the students to record what the item is, where it was manufactured, and if possible, the approximate price paid for each item.  Give the students about five minutes to complete this activity.
2. Ask the students to share some of the items from their lists and record the information on Visual 1 by placing the visual under a document camera.
3. Ask the students to look at the list of items and identify what trend they observe. [Answers will vary. Students may notice that many are from a particular country such as China, India, Taiwan, and Vietnam.]
4. Discuss the following:
   1. Why are so many of the goods we buy made in other countries? [Answers will vary. Students may point out different factors such as cheaper labor, less regulation, stronger value of the dollar,or the level of income in a country. Perhaps some may recognize that comparative advantage (or differing opportunity costs) is a key factor.] Note: people buying the goods and services must use their own currencies to purchase currency of the other country and then use that currency to purchase the goods and services.
   2. How do people in one country pay for the goods and services they buy from other countries? [Answers will vary.  Some students may think that the government in a country pays for the goods from other countries because they have heard of a trade deficit.]
   3. How do people from other countries who visit the United States pay for the goods and services they buy here? [Answers will vary; Hopefully students will recognize that they pay with U.S. dollars.] Note: visitors use their own currencies to purchase U.S. dollars and then use U.S. dollars to purchase U.S. goods and services.
5. Explain that when people buy goods and services imported from another country or when they visit another country and buy goods and services there, typically they must pay for those goods and services in that country’s currency. Likewise, when people from other countries visit the U.S. or buy goods and services exported from the U.S., they must pay in U.S. dollars. Note: specifically, the importer pays for goods in the currency of the country from which the goods are being imported. They are then sold to domestic consumers who pay for them in the domestic currency.
6. Explain that to make these types of transactions easier, people developed foreign exchange markets. Foreign exchange markets allow people to buy and sell currencies.
7. Explain that because of foreign exchange markets the value of currencies fluctuates. This means that the price of one currency relative to another depends on the demand for and the supply of that currency. When the price fluctuates people say that the value of one currency has appreciated or depreciated relative to the other. Explain that appreciation occurs when a country’s currency increases in value relative to another country’s currency. Depreciation occurs when a country’s currency decreases in value relative to another country’s currency. For clarification, explain that when U.S. currency appreciates it is good news for importers because people in the U.S. can buy more goods for a dollar. However, that same change is bad news for exporters because our goods are now more expensive for foreigners to buy. When U.S. currency depreciates, it is bad news for importers because we can buy fewer goods for a dollar. However, that same change is good news for exporters because our goods are now less expensive for foreigners to buy.
8. Show the EconEdLink Foreign Exchange video www.preview2.econedlink.org/interactives/index.php?iid=226&type=educator. After viewing the video, complete the quiz with the class as a whole. This video provides a good visual of the role that exchange rates play in the market.
9. Distribute a copy of Activity 2 to each student. Explain that students will learn how to determine the price of a good in U.S. dollars when given the price for the good in another country’s currency.
10. Explain that an exchange rate is a ratio between two currencies. A ratio describes the relationship between two measures, expressed as the number of times one is bigger or smaller than the other. For example, one mile equals 1.60 kilometers. The ratio 1 mile/1.60 kilometers describes the relationship between miles and kilometers and indicates that a kilometer is 1.60 times longer than a mile or 1 mile is .625 the length of a kilometer. Ask students to refer to Question 1 from Activity 2 and ask them how a ratio might help them calculate the price of a hamburger combo meal in U.S. dollars when given the price in another currency. [Answers will vary, but students may recognize that they can develop an equation to express the ratio.]
11. Explain that to calculate the number of dollars it will take to buy a foreign good you must divide the price (in the foreign currency) of the foreign good by the number of units of foreign currency one dollar can buy. For example:
    • The price of a hamburger combo meal in Germany is 3.76 euros.
    • The current exchange rate is $1 = .85 euros.
    • The calculation is 3.76 euros/ .85 euros= $4.42 U.S. dollars
    • So, to buy the hamburger combo meal in Germany, a person would have to use $4.42 to buy 3.76 euros.
12. Distribute a calculator to each student and allow time for them to complete Table 2 on Activity 2. Use the information below to review their answers.

13. Upon completing Table 2, have students read and develop an answer for Question 3: Analyzing the exchange rates above, how would you determine if the value of the U.S. dollar appreciated or depreciated?
14. Ask students for responses to Question 3. [An appreciating currency makes foreign goods less expensive, which results in increased buying power. This means that people’s money will go further. In the case of the U.S., this means that fewer dollars are required to buy foreign goods. A depreciating currency makes foreign goods more expensive, which results in decreased buying power. As a result people’s money does not go as far.  In the case of the U.S., this means that more dollars are required to buy foreign goods.]
15. Ask students to share their responses to how each currency changed in value relative to the U.S. dollar from January to March.

16. Pair the students and tell them that they are going to participate in an activity to see how the buying power of U.S. dollars against foreign currencies changes over time. Give each pair a country of origin from Activity 3. Tell them they are visiting the United States. Monthly expenses while staying in the U.S. are $700 for rent and utilities, $120 for food, $50 for transportation, and $45 for miscellaneous expenses.
17. Have student pairs share a computer. Instruct the students to access the exchange rate interactive at technology.councilforeconed.org/exchange-rates/. Tell the students to use the exchange rate interactive to determine the cost of staying in the U.S. today. Distribute a copy of Activity 4 to each pair. Ask students to determine the cost for each expense in their assigned country’s currency. Ask them to record the information along with the amount in U.S. dollars for today and for two months ago. Note that the interactive has currency exchange rates from most countries. Students could work individually and select any of the countries listed. The exchange rates change daily so students may have slightly different exchange rates depending on the day and time they complete the activity.
18. Check for understanding by asking the following questions
    1. Did your currency appreciate or depreciate over time (i.e., after switching months)? [Answers will vary, but should be based on whether their home currency became stronger or weaker against the US dollar; that is, were they able to use fewer of their home currency to buy U.S. goods or did they have to use more of their home currency to buy U.S. goods?]
    2. What happened to the amount of money one needed to live in the US? [Answers will vary, but students’ answers should be based on their answer to the previous question and what they observed in the interactive.]
    3. What may be some consequences if a person is in a foreign country and his or her home currency depreciates against the currency of the country the person is visiting? [Answers will vary, but possible answers could be that they will not be able to pay their bills, or will not be able to buy as much food.]

Multiple Choice

1. Which of the following situations typically would result from an appreciating U.S. dollar relative to the Canadian dollar?
   1. More Canadian tourists visit the U.S.
   2. Canadians purchase more U.S. goods.
   3. Fewer American tourists visit Canada.
   4. [Americans purchase more Canadian made products.]
2. If the price of an iPad in Brazil is $500 U.S. dollars and 1140 Brazilian Real, what is the exchange rate of Brazilian Real to U.S. Dollars?
   1. 0.43 Brazilian Real to 1 dollar.
   2. [2.28 Brazilian Real to 1 dollar.]
   3. 1640 Brazilian Real to 1 dollar.
   4. 640 Brazilian Real to 1 dollar.
3. With an exchange rate of 0.73 euros for 1 dollar, a US company is able to purchase 100 trucks from Germany. If the exchange rate shifted to 1 euro for 1 dollar, what would happen to the price the US company would pay for trucks?
   1. [The price would go down, because the US dollar has appreciated.]
   2. The price would go up, because the US dollar has depreciated.
   3. The price would go up, because the US dollar has appreciated.
   4. The price would go down, because the US dollar has depreciated.

Short Answer

Sony is exporting its newest gaming system to the US. The system costs 40,800 yen in Japan. If the dollar is valued as 102 yen, what is the price of the system in US dollars? Show your work.

[40,800/102 = $400]

GM produces and sells a compact car for $26,000. Volkswagen produces and sells a compact car for 19,000 euros. If the exchange rate is 1 dollar for 0.72 euros, which car would be the least expensive choice? Show your work.

[The GM car would be cheaper—18,720 euros versus 19,000 euros for the Volkswagen.

26,000 X .72]

[The GM car would be cheaper—$26,000 versus $26,389 for the Volkswagen

19,000/.72]

1. Review the importance of exchange rates with the students by asking the following questions:
   1. Why are exchange rates important? [They make it easier for people in or from one country to make purchases in or from people in other countries.]
   2. What do we mean when a currency is appreciating/depreciating? [The currency is gaining/losing value relative to another currency.]
   3. What happens to the exchange rate when a currency appreciates/depreciates? [The currency can be exchanged for more/less of the second currency and this affects how much can be purchased in the other country.]Point out that exchange rates tell us how much a good or service made abroad will cost in our own currency.