Lesson Summary: Exchange rates
|exchange rate||the price of one currency in terms of another currency; for example, if the exchange rate for the euro (€) is yen (¥), that means that each Euro that is purchased will cost yen.|
|appreciate||when a currency becomes more valuable relative to another currency; a currency appreciates when you need more of another currency to buy a single unit of a currency.|
|depreciate||when the value of a currency decreases relative to another currency; a currency depreciates when you need less of another currency to buy a single unit of a currency.|
|floating exchange rates||when the exchange rates of currencies are determined in free markets by the interaction of supply and demand|
The exchange rate is the price of one currency in terms of the other
If a currency appreciates it is more valuable; if a currency depreciates it is less valuable
Calculating the cost of something with exchange rates
- We are used to thinking about buying things with a currency, so many new learners are confused about what the price should be in the market for a currency. Buthe price of an orange is never given in oranges; it’s given in some other currency. Just like an orange, a dollar can’t be bought with itself, but instead, it needs to be bought with some other currency.
- A common misperception is that a strong currency is always what is best for a country. On the one hand, if a currency appreciates, all of its imported goods get a lot cheaper. If a country tends to import a lot more goods than they export, then an appreciated currency might be desirable. But on the other hand, if a country relies heavily on exports, an appreciating currency isn’t such a great thing. When a currency appreciates, the exports from a country that use that currency will decrease because all of those goods are more expensive to countries other currencies.
Questions for review
- What is the exchange rate of the kroné? What is the exchange rate for the cedi? SHOW YOUR WORK.
- If the trading price changes to 25 kroné per cedi, what has happened to:
- If the cost of a fermented shark sandwich in Iceland is 1500 kroné, what is its cost in cedi to a tourist from Ghana based on a trading price of 1 cedi for 20 kroné? Show your work.