Exchange Rates

Exchange Rate

The value of one country’s currency expressed in terms of another country’s currency.

Foreign Exchange Markets

Markets where currencies are bought and sold, and exchange rates are determined.

Appreciation

An increase in a currency's value on the forex market.

Deprecation

A decrease in a currency's value.

Floating Exchange Rate

The value of a currency determined freely in the forex market by changes in demand and supply.

Managed Exchange Rate

The value of a currency that is closely managed by government and central bank policy.

Fixed Exchange Rate

A system where the value of a currency is fixed against another currency, usually the US dollar.

Real Exchange Rates

The nominal exchange rate of a currency adjusted for the relative price level in each country.

Advantages of a floating ER

Relatively balanced trade and central bank policy allowed to be used for domestic objectives.

Disadvantages of a floating ER

Uncertainty among international investors and imported inflation.

Current Account Surplus

Occurs when exports are greater than imports, leading to increased demand for the domestic currency.

Current Account Deficit

Occurs when imports are greater than exports, leading to a depreciation of the domestic currency.

Currency Appreciation

When a currency gains value, making exports more expensive and imports cheaper.

Currency Depreciation

When a currency loses value, making exports cheaper and imports more expensive.

Exchange Rate Fluctuations

Changes in exchange rates that affect the price of goods in other currencies.

Calculating Reverse Exchange Rates

Finding the value of the second currency in terms of the first by taking the reciprocal of the exchange rate.