Exchange rate

What is the exchange rate?

The exchange rate, also known as the exchange rate, is the value relationship between two currencies. In other words, it is the reference in units of National currency that must be paid to acquire a foreign currency.

Similarly, it represents the number of units of national currency that is obtained by selling a unit of foreign currency.

Exchange rate classes

In practice, there are several types of change:

• Nominal exchange rate: represents the direct relationship between the currencies of two countries. For example, to get 1 US dollar you need 20.50 Mexican pesos.
• Real exchange rate: in this case, the relationship is measured in real terms, that is, between the goods and services of one country compared to those of another, which makes it possible to assess the impact on the social economy.
• Fixed exchange rate: when the Central Bank of each country (highest monetary authority) sets its value and maintains it at that level.
• Variable or flexible exchange rate: the rate varies according to the relationship between the supply and demand of the market's currencies. There is no intervention by the State.
• Exchange rate of horizontal bands: it is a mix of the previous 2, so exchange rate variations are allowed within a given value range. For example, they can fluctuate by +/- 3%.

Importance of the exchange rate

The exchange rate is important since:

• It serves as competitiveness indicator of a country with the rest of the world (real interest rate), since it relates the internal prices of national production with international prices.
• Allows you to determine the amount of foreign currency per local currency unit required to acquire products and services from different countries of the world. The US dollar is generally widely accepted and makes it easy to compare foreign currencies.
• In economic terms, it is a measure of economic stability of one country compared to another. The successive variations in the exchange rate with respect to another specific currency account for the economic crisis that the local country is going through.

How is the exchange rate defined?

The exchange rate is defined in the currency market, place where the currencies of the different countries are traded, so the price of each currency is set based on the supply and demand that exists for it. For example, the demand for dollars may arise when consumers in Mexico or other Latin American countries require them to purchase products and services (goods, investments, etc.) from the United States.

Thus, the equilibrium point between supply and demand will determine the value of the exchange rate.

For example, the dollar per Mexican peso: u $ s 1 = $ 20.50. It can be seen that the US currency has a higher value than the Mexican. In economics, it is often said that the Mexican currency is depreciated, since it has a lower value compared to the foreign currency.