IE - Exchange Rates Lesson
Exchange Rates
The value of a foreign nation’s currency in relation to your own currency is called the exchange rate. When foreigners demand more of a currency, the value of that currency appreciates or increases; we say this currency is stronger.
- Example: More Europeans are traveling to Florida to visit Walt Disney World. They need more U.S. dollars so the dollar will appreciate compared to the euro.
When foreigners want less of a currency, the value of that currency decreases or depreciates; we say this currency has gotten weaker.
- Example: The U.S. is experiencing inflation. Canadian consumers will not want to pay higher prices for U.S. goods so they will not want as many U.S. dollars. The U.S. dollar will depreciate compared to the Canadian dollar.
Who Benefits and Who Loses When Exchange Rates Change?
When your currency appreciates, foreign goods become cheaper meaning imports will increase. Exports will decrease because domestic goods are more expensive. Travelers want to travel to countries with a weaker currency than their own.
When your currency depreciates, your goods become cheaper, so exports to other countries will increase. Imports decrease as foreign goods become more expensive. It will cost you more to travel to countries whose currencies are stronger than your own.
Effects of a Strong or Weak Dollar
As the dollar becomes stronger...
American exports decline; imports increase; cheaper travel
As the dollar becomes weaker...
American exports rise; imports decrease; more expensive to travel.
Exchange Rates Practice
| 2021 | ||
|---|---|---|
| Currency | 1 U.S. Dollar | In U.S. Dollars |
| Chinese yuan | 6.67 | $0.15 |
| 2022 | ||
| Chinese yuan | 6.34 | $0.16 |
Look at the exchange rate table above. Can you tell if the Chinese yuan appreciated or depreciated against the U.S. dollar? If you said the yuan appreciated, you are right! One yuan used to cost $0.15; now 1 yuan costs $0.16. The table also shows us that it now takes 0.33 less yuan to buy $1 in 2022 than it did in 2021.
International Economics Vocabulary Review
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