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# Exchange rate primer

AP.MACRO:
MKT‑5 (EU)
,
MKT‑5.A (LO)
,
MKT‑5.A.1 (EK)
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MKT‑5.A.2 (EK)

## Video transcript

you're already likely familiar with the notion that a dollar in the US a US dollar is not necessarily equivalent to one currency unit in another country say one euro and so if you were traveling to that country and you are holding dollars and you need to exchange those dollars into euros you'd say well how many euros am I going to get for my dollars or if you were European and you had a certain number of euro and you said how many dollars am I going to get for my euros you would be thinking about the exchange rate and it's not just about if you're a tourist or you're travelling it's also very important if you're an importer and exporter if you make say cars in the United States where all of your costs are in dollars but you're selling them in Europe where you're getting your money in terms of euros and then you have to convert them back to dollars to pay your costs well the idea of an exchange rate matters a lot and so first let's make tangible what an exchange rate even looks like and there's many different ways of representing it the first thing to appreciate if someone says what's the exchange rate for the US dollar your next reaction should be with regards to what other currency so if I said what's the exchange rate of the US dollar with respect to the euro you could express that as one US dollar u.s dollar is equal to how many euros and at the time of this video it's actually 0.87 euros now another way to express this is 1 euro 1 euro is equal to how many US US Dollars and if you know this first equation you can figure out the second one you would essentially just divide both sides by 0.87 if you divide this by 0.87 you get 1 if you divide one by 0.87 you're going to get approximately 1.15 and so at the time of this video 1.15 u.s. dollars is equal to one euro or another way to think about it is if you took a dollar fifteen cents in the US and convert it to euros you would get one euro and there's other ways of expressing it you could say what is the price of a US dollar so price of the US dollar in terms of Euro in terms of Euro so this is how much would it cost to buy one US dollar in terms of euros well you could just look at this over here and you could say well one US dollar is going to cut cost 0.87 euros or you could say 0.87 euros euros per US per US dollar and if you were to go the other way around if you wanted the price of the Euro price of the Euro in terms terms of the US dollar US dollar well that would be the other way around one euro would cost a dollar fifteen cents so this would be one point one five US dollars dollars per euro now with all of this out of the way let's actually do some calculations let's imagine that in the United States a yellow box goes for twenty dollars these yellow boxes are in high demand someone from Europe wants to buy one of these yellow boxes and they need to buy it for twenty US dollars but they only have euro how many euro would they need in order to buy that box for twenty US dollars well if one US dollar is equal to 0.87 euros then twenty US dollars is going to be 20 times as many euros so we could say 20 dollars times 0.87 euro per dollar this symbol right over here is shorthand for euro and so you are going to get let's see that would be seventeen approximately approximately seventeen point four zero euro and if it went the other way around let's say that red boxes are available for purchase only in Europe for 20 euro an American tourist goes there wants to figure out how many US dollars would they have to convert in order to be able to pay for one of these red boxes that are 20 euro well here we see one euro is equal to one point one five US dollars so here you would say 20 euro times one point one five US dollars dollar per euro and so what is this going to be this is going to be 20 times 1.15 which is going to be 23 US dollars 23 US dollars now another idea a related idea to this is this notion that currencies can appreciate and depreciate so let's say that the euro appreciates appreciates and it always matters relative to something so they say relative to the dollar so the euro appreciates relative to the dollar come up with an exchange rate that would show the euro appreciating relative to the dollar with this as a starting point so one scenario where this is happening is if this was where you are starting one euro would now be more US dollars more than one point one five US dollars so you have one euro would now be equal to maybe it's equal to a dollar 20 now so it's now equal to one dollar 20 cents now if someone said the dollar appreciates relative to the euro then it would go the other way around that might be one US dollars is now equivalent to 0.9 euros or maybe one euro or 1.05 euros and similarly if someone says that the euro depreciates depreciates relative relative to the dollar that's another way of saying that the dollar has appreciated relative to the euro so this could be a situation where if the euros depreciating relatives the dollar from this place right over here 1 euro 1 euro is now equal to fewer dollars so maybe this is now equal to a dollar 5 and with this as a starting point this would also be a situation where the dollar has appreciated relative to the euro so I'll leave you there this is a primer on exchange rates it can get a little bit confusing because you're talking for the price of a currency in terms of another currency but I encourage you to keep thinking about things keep doing these little thought experiments in your head and thinking about ok if a euro is equal to more than a dollar if something's worth a certain number of euros it should be larger it should be a larger number in terms of dollars similarly if a dollar is less than one euro if something costs a certain number of dollars it should be a smaller number in terms of euros