Exchange rates: floating, fixed, Marshall–Lerner & the J-curve
An exchange rate is just a price — the price of one currency in terms of another — but few prices matter more to a small, open economy like Namibia's. In this lesson we see how a floating rate is set by demand and supply, and how a fixed rate is pegged by the central bank; we get the four key words exactly right (depreciation, appreciation, devaluation, revaluation); and we analyse how a change in the currency feeds through to trade, aggregate demand and inflation. Two AS ideas anchor the analysis — the Marshall–Lerner condition and the J-curve — and throughout we keep one eye on the Namibia dollar's one-to-one peg to the South African rand.
By the end you should be able to (NSSCAS Economics (AS) 6.2):
- Explain what is meant by floating exchange rates
- Differentiate between depreciation and appreciation of currencies
- Explain what is meant by fixed exchange rates
- Differentiate between devaluation and revaluation of currencies
- Analyse the effect of depreciation and appreciation of currencies on international trade
- Consider the effects of exchange rate changes on the domestic and external economy using aggregate demand, Marshall-Lerner and J-curve analysis
Miss Hilma and Mike talk through the whole topic — with the figure and working drawn live.