Hi, guys. Welcome back to Global Business Environment Course Two. This is module one and this will be part three. And we're still trying to answer the question, what's the impact of currency exchange rates on the global business environment. If you recall last time we were talking about fixed versus floating exchange rates, and we were describing the fact that in some countries and some societies and some economies, that exchange rates are determined by, governments. And that does provide more stability for, local citizens and consumers. But in other, economies, the market is allowed to determine the exchange rate, and we call that a floating exchange rate system. We looked at a couple of graphs last time to try to understand that. And if you recall, we mention that if we understand the way supply and demand works if tourism increases for example from foreign countries into a country like Australia, then we expect the, everything else held equal, we would expect the price of the, or the value of the Australian dollar to increase, because its, people are selling Dollars and Euros and other currencies to come to Australia and, buy Australian dollars to spend locally. And the same thing happens with imports and exports. At some times in some places across borders as exchange rates change you see behavior, influenced by that, those values. So, for example, in the recent past the U.S. Dollar compared to the Euro has decreased in value, relative to the year before, and therefore, there was an increase in tourists who came to the United States to go to places like Disney World and Disneyland. And we saw the exports from the United States to Europe of things from Caterpillar tractors to other computer services, computer products that are made in the United States exported because it was relatively cheap for those who use the Euro. And so that's a, kind of getting a little bit more into how this all works. And so to understand what I was just describing, I want to show you this picture. This is a picture of the value of the Euro, one Euro, in Australian Dollars. So on, on this side of the, of the scale, or on this axis, we have the, value, or price, of Australian Dollars compared to one Euro. On this, on this axis we have time and the Euro has held constant. And so as you see, as you look at this you see that there are some ups and downs. And you see that in the period 2008 2009 there was this global financial crisis that occurred. And you see a big increase here in the graph and then you see this kind of steady decrease over time up until the, the recent past, last year. So let's look at what's going on here on this graph and try to understand how these values change over time. if, if we try to understand this, we see that, to buy, one Euro in 1999, it took 1.9 Australian Dollars. Two years later, in 2001, it took 1.5 Australian Dollars to buy one Euro. So think about that for a minute. Has the Australian Dollar strengthened or weakened compared to the Euro in that period of time? Does it take more or fewer Australian Dollars to buy one Euro in that two period, two-year period? It takes fewer, so the Australian Dollar goes stro-, goes further, it's stronger. We would say that the Euro is weakened compared to the Australian Dollar, and we would say that the Australian Dollar has strengthened. If you, lived in Australia, it might have been a good time to head to, to Europe, and to travel there and be a tourist and buy locally. Imports, from European countries that use the, that use the Euro would have been less expensive for, local citizens of Australia. And we see these peaks and valleys, and then we come over here to 2008, 2009. Here we see a strong devaluation, an abrupt devaluation from about 1.6 Australian Dollars to one Euro, to over 2.0 Australian Dollars to one Euro. What do you think might have caused that? What was going on in the global markets? One, one explanation that's often mentioned is that at this time people were very nervous about the future of the global economy. If you recall there was even concern that we might be entering another Great Depression or another depression. And so, there was increased demand for what investors, individuals, et cetera, viewed as safer currencies. And so the Euro, was seen as a safer currency, at the time. And so people sold Australian Dollars and, bought the Euro. So that, decrease in demand for the Australian Dollar, caused this spike in the, and the increase in demand for the Euro caused this spike in the value here. And it was a devaluation of the, of the Australian Dollar. Since then, we've seen record values for the Australian Dollar. Since then the Australian Dollar has continued to strengthen. It has taken fewer and fewer Australian Dollars to buy one Euro since 2009. And now it's down to in 2012, 13, to the 1.2 to 1.3 Australian Dollars to one Euro. Now you may say, what's going on here? And that, there's always a lot of complex factors, but one that we know is that there has been a somewhat of uh,uh, global uh,or a European crisis a debt crisis in many of the economies in Europe. And so, there's been concern that they have not, would not be able to pay back their debt, some of the nations there in the European Union. And therefore there would be inflation which would cause the Euro to be devalued. And so that may be the reason that we see this strengthening of the Australian Dollar compared to the Euro. So just to wrap this up or to summarize, recall that we said that exchange rates are the value of one currency in terms of another. We've said that it really only makes sense to talk about that price, or that market, in terms of two currencies. And we've said that it really only makes sense to talk about it strengthening and weakening when we look at it over time, because this shows how it impacts real customers and real people. And so, here's how some researchers Balassa and Samuelson say that this process works, this exchange rate change. They talk about changes in productivity internal to an economy. They talk about changes in wage levels as as employees become more productive and better. They talk about increases in prices for goods and services. And then they talk about if a floating exchange rate is allowed that you'll see this rise in the exchange rate between two countries if you see this growth and these changes in prices. If you have a fixed exchange rate you simply get inflation, they say. We've been talking about a floating exchange rate system, and assuming here that market forces are at work, and as, and as labor prices, and the prices of other goods and services change as productivity increases, and as the macro economy and all these things going on with recessions and depressions, worries occur, that you see these changes, going on. But there are lots of factors that, that play into, determining exchange rates. We've been focusing on supply and demand. We'll talk next time about another factor that's involved in, determining exchange rates, and that's interest rates. And we'll then explore other aspects of the foreign exchange market. Thank you so much. We'll see you back next time
