Thursday, April 9, 2015

Mini lesson--US Dollar vs the Euro.

One year ago (April 9th, 2014) the US dollar price per Euro was $1.40.  Read that as it took $1.40 to "buy" 1 Euro dollar. If I wanted to buy something that was priced in Euros, say 100 Euros, I would have had to exchange $140.00US dollars in order to buy it.

Today (April 9th, 2015) the US dollar price per Euro is $1.08. Read that as it takes $1.08 to "buy" 1 Euro--rounded up a bit). If I wanted to buy that same item today and it was still priced at 100 Euros, I would have to exchange $108.00US dollars to make that purchase.

When I exchange my US Dollars to get 100 Euros I give up FEWER US Dollars today than I did one year ago to do so---$32.00 to be exact. The purchasing power of a US Dollar relative to the Euro has INCREASED by 23% ($32.00 divided by $140.00 X 100) in 365 days.

In Macroeconomic terms, we can say the US Dollar has APPRECIATED by 23%.

Assuming businesses in the EuroZone did not change their prices over the course of the year, Europe is "On Sale" by 23% today for the holders of US Dollars.

Here is the strange part.  If Americans take advantage of this "sale" and go to Europe on vacation, this affects the IMPORTS of goods and/or services to the US from the EuroZone.  This is a bit counter-intuitive because we usually think of imports as foreign stuff that is already in the US that we purchase (think Walmart, for example).

Consuming a European good or service, whether here or "there", is considered an import.

Here is your homework.  Consider the above example from the perspective of a holder of Euros, using the same exchange rates. Re-write the explanation from that perspective.

Hope this helps you understand a bit more the complex concept that is exchange rates.

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