Question

What is meant by foreign Exchange Rate ?

Hint:

Currency Appreciation means the domestic currency has become stronger (e.g., from 80 to 75 per dollar).
Currency Depreciation means it has become weaker (e.g., from 80 to 85 per dollar).

Answer 1

Step 1: Understanding the Concept:
Since every country has its own legal tender (currency), international trade requires a mechanism to determine how much of one currency is needed to buy another.
Step 2: Detailed Explanation:
The exchange rate acts as a bridge between the price levels of different countries.
1. Example: If you need to pay \( 83 \) Indian Rupees to obtain \( 1 \) US Dollar, the exchange rate is \( \$1 = \text{₹}83 \).
2. Determination: In a free market, this rate is determined by the intersection of the demand for and supply of foreign exchange.
3. Types: It can be a Fixed Exchange Rate (set by the government) or a Flexible/Floating Exchange Rate (set by market forces).
Fluctuations in this rate directly impact the cost of imports and the earnings from exports for a nation.
Step 3: Final Answer:
The foreign exchange rate is the external value of a domestic currency in the international market, defining the ratio of exchange between two currencies.