Exchange Rate Definition

The different types of money that are used among various countries are known as currencies. Each country has its
own currency, and the value of each currency is different. The term exchange rate refers to the rate at which one
currency can be exchanged for another. For example, if country A's currency is worth more than country B's currency,
then the exchange rate will be higher for country A. This means that it takes more of country B's currency to buy the same
amount of country A's currency.
Most exchange rates are not static but are instead in a constant state of flux. This is due to the fact that the value of each
currency is constantly changing in relation to other currencies. The exchange rate between two currencies can be affected
by many factors, such as the political situation in a country, the country's economic stability, and the level of demand for
the currency.

What Causes Exchange Rates to Change?

As previously mentioned, there are a large variety of factors that can cause exchange rates to change. Many of these
factors are country-specific, while others are international or global in scope. Some examples of factors that can cause
exchange rates to change include:
 Political factors: Changes in a country's government or policies can impact the value of its currency. For example, if a
country's government is unstable, this may lead to investors selling off the country's currency, causing its value to
decrease.
 Economic factors: A country's economic health is one of the most important factors that helps determine the value of its
currency. If a country has a strong economy, this will usually lead to an increase in the value of its currency. On the other
hand, if a country's economy is weak, this will typically cause the value of its currency to decline.
 Central bank policy: Changes in a central bank's monetary policy can also affect exchange rates. For example, if a central
bank raises interest rates, this will usually lead to a rise in the country's currency relative to other currencies.
 Supply and demand: The law of supply and demand also applies to currencies. If there is high demand for a particular
currency, this will cause its value to increase. Similarly, if there is low demand for a currency, this will typically cause its
value to decrease.
 Inflation: Inflation can also have an impact on exchange rates. If a country's inflation rate is high, this may lead to a fall in
the country's currency relative to other currencies.
While these are some of the most important factors that can impact exchange rates, it is important to remember that there
are many other factors that can also play a role.

What is Currency Appreciation?

Currency appreciation is when the value of a currency increases in relation to other currencies. This appreciation can be
caused by a variety of factors, such as economic growth or central bank policy. When a currency appreciates, it takes more
of another currency to buy the same amount. For example, if the US dollar appreciates against the euro, it would take
more euros to buy the same amount of US dollars. This can have several benefits for a country, such as reducing inflation.
This is in direct opposition to the concept of currency depreciation, which is when the value of a currency decreases in
relation to other currencies. This can occur due to several causes including inflation, certain monetary policies, and
economic recessions. When a currency depreciates, it takes less of another currency to buy the same amount. For example,
if the US dollar depreciated against the Japanese yen, it would take less yen to buy the same amount of US dollars.
Depreciation can result in a variety of effects including higher inflation and the falling of real wages.

How Do Exchange Rates Affect International Trade?

One of the main effects of variations in exchange rates is the impact it can have on international trade. When exchange
rates change, the prices of goods and services in different countries also change. This can impact the demand for these
goods and services, as well as the prices that consumers are willing to pay. For example, if the US dollar appreciates
against the euro, this means that US goods and services would become more expensive for European consumers. As a
result, demand for these goods and services would decrease, and US exports would fall. The following sections will
explore the effects of strong and weak exchange rates on international trade.

What is a Currency Exchange Rate?

A currency exchange rate is the amount of one currency that it takes to equal a certain amount of another currency at any
given point of time. A currency exchange rate may also be known as a rate of exchange or a foreign exchange rate. The
rate is usually expressed as a decimal compared to one whole number of another currency. For example, 1 U.S. dollar is
equal to 1.5 Australian dollars. Changes in currency exchange rates are based on the economic activity of the government
entity controlling the money supply, interest rates, supply and demand, and inflation. The majority of currency exchange
rates are said to be floating, which means they can change quickly, be somewhat volatile, and are not backed by any sort
of physical element, such as gold.

How do Exchange Rates Affect International Trade?

When a country's exchange rate appreciates, the value of their currency is higher, which in turn makes their goods more
expensive. This decreases exports from that country because of their increased expense. As a result, the imports into that
country will increase as it is cheaper to buy goods from other places. An increase in exchange rates reduces the balance of
trade in a country by reducing exports and increasing imports. If a country's imports are valued higher than their exports,
the country is said to have a trade deficit and a lower demand for their currency. This drives the currency exchange rate
down.

Impact of Changes in Currency on Imports

Imports include products or goods that are produced in a foreign country and sold domestically. An increase in the value
of domestic currency, such as the US dollar, increases the demand for imports. Goods produced in a foreign country
become cheaper as the value of the dollar increases because buying products made domestically is more expensive.

Impact of Changes in Currency on Exports

Exports include products or goods that are produced domestically and sold to other countries. A strong domestic
currency results in a decreased demand for exports. The products or goods produced domestically are more expensive
than goods produced in foreign countries. As an example, if US exports to Japan increased, the value of the U.S. dollar
must have decreased, making U.S. goods cheaper for Japan.

Foreign currency exchange rates are determined in open markets by both supply and demand

Introduction to Foreign Currency Exchange

Have you ever been on vacation in a foreign country and wondered about the exchange rate? For example, why is it that a
Canadian dollar is just about the same as a U.S. dollar, while a U.S. dollar is worth over 12 Mexican pesos? Where do
these conversion rates come from anyway? Well, just like the price of any good, exchange rates are determined on open
markets under the control of two forces: demand and supply. Remember the laws of demand and supply?

Law of Demand
Demand is simply the amount people in a market (consumers) who are willing and able to buy at different Prices. Ability
depends on the personal budget and willingness reflects how much you like a product. A vegetarian will not buy any
steak, no matter how low the price! The law of demand says that the quantity demanded for a good falls as the price rises
and increases as the price falls. We see this happen every year on Black Friday. So, price and quantity demanded are
inversely related. Therefore, the demand curve slopes downward.

Law of Supply
Supply is simply the amount of goods owners or producers offer for sale. The law of supply says that the quantity of a
good supplied rises as the market price rises and falls as the price falls. In other words, price and quantity supplied are
directly related: If price goes up, quantity supplied will increase; if price goes down, quantity supplied will decrease. The
idea here is that when the price of something you own goes up, you're more inclined to sell it. Suppliers work the same
way; if the price of a good that they produce goes up, then there is a higher incentive to sell more of that good because
they can make more profit!

Supply and Demand for Currency

Just like the value of a good is determined by the supply and demand for that good, the value of a nation's currency is
determined by the supply and demand for that currency. For example, during the 2012 Summer Olympics in London,
tourism to England increased. That could have caused an increase in demand for the British pound and the value of the
pound to rise. Generally, exchange rates vary as demand for goods from nations vary. More demand for British goods, for
example, would change the demand for the British pound. Just as supply and demand dictate the value of a good, supply
and demand will dictate the value of the British pound as well.
Demand for Currency
What would you do if you could buy your school books at a lower price from a supplier in England than in the U.S.? You
would probably go online and order the book from the British company and save money. But before you can buy your
school books from the British supplier, you'll have to exchange your money for the British pound. Even if they accept
U.S. dollars, the seller from England ultimately wants to be paid in pounds. So, eventually the money will get exchanged.
The better deal creates higher demand for English currency.
The demand curve for British pounds in terms of the U.S. dollar is a normal downward sloping demand curve.

As the price of pounds falls, British imports get cheaper. US consumers are willing to buy more British goods, so they need more
British pounds.

This is because if the value of the British pound went down relative to the U.S. dollar, the quantity of pounds demanded
by Americans would increase; when pounds go on sale, more pounds are sold! Pretty much the same idea behind the
demand of a good.
For Americans, British goods are less expensive when the pound is cheaper and the dollar is stronger. Assuming there is
only trade between the U.S. and England, when the value of the British pound goes down, Americans will switch from
American-made goods to British-made goods. But before we can purchase goods made in Britain, we have to exchange
dollars for British pounds. Consequently, an increased demand for British goods is simultaneously an increase in the
quantity of British pounds demanded. In other words, when the price of British pounds goes down, the quantity demanded
for British pounds goes up.

Fixed Exchange Rate Definition

The exchange rate measures the value of one currency in respect to another. One can think of it as the cost of converting
one currency into another, and that's exactly what an exchange rate is. A currency's exchange value fluctuates constantly
due to the fact that it is traded every day. As with gold or stocks, this produces a spike and fall in price. Over-the-counter
(OTC) foreign exchange trading is a global marketplace that sets the exchange rates of currencies. Fixed exchange
rates are established in nations with central banks. On the other hand, floating exchange rates are controlled by market
supply and demand.

In terms of exchange rate regimes, there are several basic types: free float, fixed, and pegged and managed float, also
called adjustable peg. When it comes to determining exchange rates, the foreign exchange market is available to a wide
spectrum of buyers and sellers. A fixed exchange rate is defined as a currency's value being linked to another's by an
agreed-upon exchange rate. Because of this, fixed exchange rate systems aim to keep the value of currencies stable. The
benefits of fixed exchange rates are more predictability for exports and imports and lower inflation. As well as those
mentioned above, many other countries have a fixed exchange rate system in place. Nations such as the UAE, Bahrain,
Saudi Arabia, Oman, Hong Kong, Qatar, and the Bahamas use a pegged exchange rate. All of these countries' currencies
have been tied to the US dollar. A country with a fixed exchange rate like China is an excellent example.

History and Origin of Fixed Exchange Rates

Rather than a pure gold standard, the Bretton Woods System (BWS) was more of a gold-exchange standard. The dollar
was forced to take center stage because of the US' political and economic dominance. During the inter-war period,
stability was highly needed and fixed exchange rates were viewed as necessary for trade. The gold standard is a type of
monetary system in which countries' currencies are linked to the value of gold. The gold standard used a floating
exchange rate mechanism when compared to the Bretton Woods system. A stable currency rate and worldwide commerce
promotion were common goals for both countries, notwithstanding their disparities. From around 1870 to 1914, numerous
countries used the gold standard or gold exchange standard to maintain fixed currency rates. After World War II, the
Bretton Woods system replaced the floating exchange rate system that had existed between the wars. It was created after
World War II in order to lend a helping hand in rebuilding nations that were war-ravaged through a series of currency
stability initiatives and infrastructure loans. An exchange rate system that was being practiced since the early 1970s broke
down and was replaced by a combination of fluctuating and fixed exchange rates.

How Do Fixed Exchange Rates Work?

There are two types of fixed exchange rates: those implemented by the central bank or the government and those based on
gold prices. Because of this, fixed exchange rate systems aim to keep the value of currencies stable. The central bank can
adjust a currency peg using an exchange rate mechanism (ERM) to normalize trade and inflation.
 Open Market Trading—By buying or selling their currency on the open market, governments can maintain a fixed
exchange rate. One of the reasons governments hold foreign currency reserves is because of this. When the
exchange rate rises above a certain threshold, the government sells its own currency (thereby expanding the
supply) and purchases foreign money. In order to reduce inflation, the Federal Reserve sells Treasury bonds to its
member banks when it wants to boost interest rates.
 Fiat—It is a government order that makes these currencies legal tender and gives them worth. Fiat currencies have
no intrinsic worth because no reserve of gold or silver backs them. Therefore, in economies with fixed exchange
rates, fiat currencies only have worth since the government continues to support that value; fiat money in and of
itself has no practical function. Examples of fiat currency include the sterling, pound, euro, yen, and US dollar
(USD).

Types of Fixed Exchange Rate Systems
Fixed exchange rate regimes include the gold standard and the Bretton Woods system. Instead of employing retail
convertibility, gold was replaced by the USD under central bank administration under the BWS. Almost all countries have
either fixed the value of their currency to a set amount of gold or linked their currency to one that has. This allows the
transfer of a country's currency into treasury bills drawn from a country whose currency is convertible into gold. The
price-specie flow mechanism assumes that when the gold standard is in place, countries with a surplus of exports import
gold (money), while those with a deficit do the opposite. It describes how the gold standard adjusts trade imbalances. The
model assumes just gold coins and a small central bank in its original form. Central banks and significant financial
organizations hold reserve currencies for international trade. A reserve currency decreases exchange rate risk because
countries don't need to trade in it. For example, if the United States were to fix the cost of gold at $500 per ounce, the
value of one dollar would equate to one-fiftieth of an ounce of gold.
United States, Canadian, Western European, Australian, and Japanese economic and financial links were formed by the
1944 Bretton Woods Agreement's monetary management system. The Bretton Woods system, the first of its kind, set the
standard for international monetary cooperation between sovereign governments. In the Bretton Woods system,
convertibility into US dollars had to be guaranteed within 1% of set parity rates.

Floating Exchange Rate System

Exchange rate regimes that allow for a free-floating exchange rate are known as floating exchange rates. Government
interference is either restricted or non-existent in an open-ended floating exchange rate system. Free-floating exchange
rates suggest that the value of a currency can shift depending on global demand and supply. Without a specific aim,
currency speculation is less likely to occur. With a floating exchange rate, the price is determined by market speculations
and the forces of demand and supply. Variations in long-term currency prices reflect changes in economic strength and
variances in interest rates between countries in floating exchange rate arrangements. Foreign exchange traders often aim
for an exchange rate that they think is fundamentally over or underpriced. Currency values constantly fluctuate as a result
of free-floating exchange rates.

Productivity is the measure of output of goods and services for every unit of input. Explore and understand how advances
in research and development affect technology, and eventually improve an economy's rate of productivity.

Technology, Research & Development and Productivity

We're talking about technology, research and development, and productivity. There are four important determinants of the
productivity of a nation. They include physical capital, technology, human capital, and natural resources. In this lesson,
we'll take a closer look at how investments in research and development lead to new technologies that make workers (or
human capital) more productive, which leads to greater economic output.
Before we dive into these concepts, I want you to join me as we take a journey into the lives of two hard workers: Jerry
and Jenny. Jerry works in the auto plant, helping Generic Motors Corporation assemble brand-new cars that will be
shipped out to all the car dealerships across the nation and sold to consumers just like you and me. Day in and day out,
they help assemble the engines that go inside the new cars.
Jerry wears both glasses and a white lab coat to work each day. Jerry's job is to think up new ways to increase the fuel
efficiency of the new cars that Generic Motors produces. They pay him a salary to better understand the world around him
and invent new ways of doing things that will benefit the company. As a result of Jerry's innovative ideas, workers are
now able to produce cars that get better gas mileage, which is not only better for the planet's atmosphere but also will cost
car owners less to drive.
As a result, Jenny, a pharmaceutical sales rep, can drive farther without filling up for gas. This means she can now see
more new business prospects without paying any more for gas. When she gains more doctors' offices as customers, her
company's sales increase. When workers at similar companies all over the nation enjoy the same advantage, then Jerry's
improvement in technology actually leads to higher productivity and more economic output as measured by the gross
domestic product, or GDP for short.

The Benefits of Higher Productivity

What you've just witnessed is what economists call the improvement of productivity. Productivity, which is looked at as
the long-run growth engine of any nation, is the amount of output that gets produced per unit of input. Higher productivity
raises a nation's standard of living, and it explains why some nations tend to grow faster than others.

Technology Increases Productivity

So, what is technology? Technology is a nation's understanding of how the world works. For example, Jerry's
understanding of the world led him to some innovative ideas for a more fuel-efficient car. When a nation develops new
technology, it applies this new understanding to the production of goods and services in order to produce more output per
unit of input. In other words, workers can produce goods and services faster, better, or cheaper. When Jenny's more fuel-
efficient car enabled her to drive farther, her increased productivity led to higher sales, another example of how
technology increases productivity.
This is exactly what happened in the late 1990s. According to the National Bureau of Economic Research, there was 'a
substantial increase in the pace of technological change in the latter half of the 1990s.' During the first half, technology
grew at an annual rate of 1.2%, but this rate more than doubled to 3.1% during the last half of the decade.
Why is this important? Because improvements in technology lead to permanent increases in the productivity of a nation.
Of course, the development of the Internet during the 1990s was one of the main drivers of this added productivity.
Increases in productivity from technology are nothing new, however. For example, when railroads were developed,
workers could transport everything from raw materials to finished goods much faster than before, when steamboats were
the fastest method of transport available.

Terms of Trade in Economics

What is terms of trade?
Terms of trade in economics can be formally defined as the ratio between the prices charged for exports and the prices
paid for imports. Terms of trade definition can be simply described as the relationship between how much money a
country pays for its imports and how much money it brings in from its exports. On the other hand, trade definition in
economics refers to the deliberate or voluntary interchange of goods between two or more economic parties.
Terms of trade can be said to have undergone an improvement if export prices increase in proportion to import prices. In
the case that import prices increase in proportion to export prices, the terms of trade are said to have deteriorated. In an
improvement scenario, there is more money available for importing because they manifest as cheaper to the individuals
and businesses in the country, which causes an improvement in the living standard.
In a deterioration scenario, the foreign currency present in the country is the country's individuals, and businesses can
purchase less and fewer goods via import, which leads to a decline in the living standard of the country. The terms of trade
is calculated by dividing the export prices index by the import prices index and multiplying the quotient by 100. It can be
formally stated as:
 Index of Export Prices / Index of Import Prices x 100
Terms of trade is important for providing key information regarding a country. First, terms of trade provide information on
just how competitive a country is. Because the value obtained through the terms of trade calculation appears in the format
of a percentage, it is easy to tell just how competitive a country is by simply looking superficially at the number. Second,
terms of trade provide information about just what capacity of commodities a country can purchase on average. When the
terms of trade is higher, one can derive that a country possesses a lot of purchase ability regarding imports. When the
terms of trade is lower, one can derive from that that a country's purchase ability when it comes to imports is very limited.
Trading economics can be described as the study of how international financial relations are structured. Trading
economics commodities involved can range from agricultural, energy, metals, and labor. A benefit of export prices
exceeding import prices is that it increases the number of goods a country can purchase through importation.
Terms of Trade Formula
In normal expression, the terms of trade formula for a country can be stated as:
 Index of Export Prices / Index of Import Prices x 100
In the formula, the index of export prices can be defined as an index derived from the price(s) of one or any specified
group of commodities being acquired or fronted in international trade using, ideally, Free on Board export prices. The
index of export prices is a metric used to measure fluctuations or increases in the prices of exports leaving the home
economy.
The index of import prices can be defined as a metric for measuring fluctuations or increases in the prices of goods and
services provided by the rest of the world and employed by individuals and businesses in the home economy. The import
price index, commonly known as MPI, is usually a monthly publication that reveals the economic status of a country.
An example regarding the use of the formula for finding terms of trade can be expressed as follows:
If a country such as Costa Rica primarily exports Magnesium and imports Titanium, then the terms of trade is simply the
price of Magnesium divided by the price of Titanium and then multiplied by 100. For instance, if the price of Magnesium
is USD 9 for a kilo and the price of Titanium is USD 17 for a kilo, then the terms of trade is basically (9/17) * 100 = 52.9.
Thus, the terms of trade for Costa Rica would be 52.9, which is very low and indicates that the country does not possess a
high purchase power when it comes to imports. It also indicates that the standard of living is low inside the country as the
citizens perceive that the exports are expensive.

Question:
The terms of trade between two goods depend on:
A. which country has an absolute advantage in the good.
B. negotiations by the Federal Reserve.
C. each country's domestic opportunity costs.
D. which country pays the transportation costs.
Export:
In global trade, export is a good made in one country and sold in another, or a service provided in one nation to a market
or a resident of the other. An exporter is someone who sells such goods or works for a specialized company.
Answer and Explanation:
The correct option is C) each country's domestic opportunity costs
The terms of trade are defined as the percentage of fare prices to import costs. The amount of import commodities that a
nation can buy for each unit of fare commodities is commonly referred to as the terms of trade. A country's terms of trade
improve because it can buy more goods for a lower price. The domestic opportunity costs of both countries influence the
terms of commerce between two goods.
E-Commerce Meaning
E-commerce is the purchasing and selling of items and services and the transaction of funds or information over the
Internet, also known as a computer network. It has enabled different functions such as advertising, servicing, delivering,
and payments through mediums such as websites and computer networks. Many local and international businesses have
shifted to practicing transactions through electronic commerce. For instance, internet retailers would opt to use PayPal as
it encourages people to do transactions without a credit card.
E-Commerce Website Definition
The E-commerce website is a term used to describe a website that facilitates the purchase and sale of tangible goods,
services, and digital commodities over an electronic network rather than in a brick-and-mortar establishment. Customers
may place purchases, pay, track shipping, and receive customer care, all from the convenience of a single website.
Depending on the nature of the transaction, it could be categorized as B2B, B2C, C2C, or even C2B (customer-to-
business). Besides, there has been a tremendous increase in online buying over the past five years. Amazon and Etsy, two
of the most well-known e-commerce enterprises, are only two examples of e-commerce businesses that range in size and
scope. A clearinghouse website can be described as an online platform that provides government agencies and different
employers access to data about real-time violations on programs such as CDL. An example is when a person buys
cleaning products from a third party listed on Amazon.
Types of E-Commerce Defined
Traditionally, e-commerce can be classified into four categories: B2C (Business-to-consumer), B2B (Business to
Business), C2B (Consumer-to-Business), and C2C (Consumer-to-Consumer) (Consumer-to-Consumer). Although B2G
(Business-to-Government) is not commonly used and recognized, it is another type of transaction, but it is typically mixed
in with B2B.
Business-to-Consumer (B2C)
It is whereby businesses sell their products and services directly to the end-user. The most common business model, B2C,
encompasses a wide range of strategies. It includes everything people buy from an online merchant as a consumer:
apparel, household items, and entertainment. B2C transactions, especially for low-value commodities, typically have a
quicker purchasing process than B2B sales. A few well-known B2C examples are Amazon and Walmart, where the final
users of a product or service are the individuals who purchase it. Also, a customer purchasing a computer from
newegg.com is an example of a B2C transaction.
Business-to-Business (B2B)
It is a concept where a company sells its goods or services to another company. Occasionally, the buyer is the final
consumer, although this is not the norm. It is predicted that by 2020, millennials will account for nearly half of all B2B
buyers, a figure that is nearly double that of 2012. With the influx of millennials into the workforce, B2B e-commerce is
becoming increasingly important for companies. Reputation Squad and Grammarly are some of the greatest B2B
websites. Newegg.com purchasing computers from Lenovo is an instance of a B2B transaction.
Consumer-to-Consumer (C2C)
In C2C e-commerce, both the seller and the buyer are individuals, not businesses. In this section, transaction or listing fees
are common revenue sources for a C2C company, also known as an online marketplace. It encourages the flow of
products and services between sellers and buyers and produces revenue. Internet pioneers like Craigslist and eBay
introduced this strategy in the early stages of the Internet's development. Consumers and sellers drive C2C companies
forward, but quality control and technological upkeep are still major concerns.

Mobile commerce, or m-commerce, refers to e-commerce conducted in a wireless

environment over the Internet. This typically occurs over mobile technologies such as
smartphones, tablets, or other wireless devices. With this technology comes two important
issues and concerns we must be aware of: consumer privacy and fraud.