Principles of Economics: Macro
If you have ever traveled to a country that does not use U.S currency, then you had to exchange your U.S. dollars into the country’s currency that you have just traveled to. You may notice that your U.S dollars have gotten you more or less of the other currency. This means you have just been affected by the exchange rate. If you have 1,000 U.S dollars it does not mean you will have an equal amount in another country’s currency. Exchange rates effects our economy greatly, because we have no choice but to imports goods from other countries, therefore however much of a good our dollar gets us in another country effects us here at home. This is because we could get more or less of a product depending on how much our dollar is worth in comparison to the country’s currency that we are trading with.
The definition of an exchange rate is the price of one country’s currency expressed in another country’s currency. If you traveled to Europe right now you would get .77 euros’ for every dollar you have. This is an example of currency depreciation on our side(but currency appreciation on their side). Currency depreciation is when a nation’s currency can buy fewer units of a foreign currency. When I traveled to India in 2008 I got forty rupee’s for every dollar I had. My sister was a rupee millionaire because of the exchange rate. If you traveled to India right now you would get 54.4 rupees for every dollar you had. This is an example of currency appreciation. When a nation’s currency appreciates your currency can buy more units of a foreign currency. The fact of the matter is that when one nation’s currency depreciates another nation’s currency appreciates.
There are different types of exchange rate systems. The two main systems that nation’s use are fixed exchange rates and...