Okay, so far we've learned that exchange rates are always quoted in pairs,
and that exchange rates can strengthen or weaken over time.
So, our next question must be,
what factors actually make exchange rates move?
Why don't you think about this for a minute,
and jot down some ideas before we move on.
So why do you think the value of currencies change relative to one another?
In fact, there are at least seven main reasons why
currencies appreciate or depreciate over time.
These reasons include, differing rates of GDP growth between countries,
differing rates of inflation,
a change in relative interest rates,
current account deficits and trade imbalances,
a change in the terms of trade,
currency speculation, and movements associated with political instability,
geopolitical risk & exogenous shocks,
like droughts and earthquakes.
Yes, that is quite a long list.
So let's take these reasons one at a time now.
So here's a question for you.
If one country's gross domestic product or GDP grows relatively faster than another's,
will that country's exchange rate strengthen or weaken,
holding other things constant?
Please go ahead and jot down some ideas before moving to the answer.