Foreign Exchange Rate

Introduction

Suppose that a wool sweater can be purchased in the U.S. for $90 and that an equivalent sweater is available in India for Rs. 3000.

Ignoring transportation costs, which sweater is less expensive?  Is $90 more or less than Rs. 3000?

It depends- On the exchange rate.

 What's the exchange rate?  If the exchange rate $1 = Rs.60, 90$ = 60x90 = Rs.5400

Indian sweater is the less expensive.  At these prices, Americans will be importing sweaters from

India.  Alternatively, the Indians will be exporting sweaters to the U.S.

Foreign exchange refers to all other currencies in the world other than the given country’s domestic currency. For example; All currencies other than rupee is foreign exchange for India.

Foreign Exchange Rate

Foreign Exchange

Yen Japan

Pound Great Britain

Euro European Union

DollarUnited States

Significance of Foreign Exchange

Facilitating Trade between countries

Law of comparative advantage

Medium for internationalPayments

Law of comparative advantage - each country should produce what it has an advantage in producing and then trade.

Everyone has a comparative advantage at something.

To find out comparative cost we compare opportunity cost of producing each good.

Opportunity cost is the loss faced by not choosing the next best option.

Foreign Exchange Rate

Foreign Exchange - Significance

Refers to the rate at which one currency is exchanged for the other.

It is the rate of parity = amount of domestic currency you need to buy currency of another country.

If 1$ = Rs.62Then, Rs 1 = 1/62 = $ 0.16

Foreign Exchange Rate

Meaning of Foreign exchange rate

The foreign exchange market is a global decentralised marketplace that determines the relative values of different currencies.

  Exchange rates are determined in markets by the interaction of supply and demand.

The exchange rate between two currencies constantly changes.