Question

What is exchange rate? Explain with the help of an example.

Answer 1

Exchange rate:

• “The rate at which the currency of one country can be converted into currency of another country is called exchange rate”.
• “Exchange rate is the price of a foreign currency in terms of domestic currency”.

Example:

• Suppose, exchange rate of US $ 1 = ₹ 60. This means that in order to buy 1 US dollar, an Indian will have to pay ₹ 60. This also means that if an American comes to India, his 1 dollar will fetch him 60 rupees.
• A rise in the exchange rate for India means that the value of Indian currency has declined in the international market.
• This means that India will have to pay more Indian rupees to buy one unit of foreign currency. This also means that the foreign currency has become expensive and hence value of Indian rupees has fallen.
• Suppose, the exchange rate is US $ 1 = ₹ 60.
• When exchange rate rises for India, US $ 1 = ₹ 65. When exchange rate falls for India, US $ 1 = ₹ 57.
• It should be noted that in reality, the actual analysis of rise or fall in the value of a currency, the time gap between the rise or fall in value of the currency, prices of goods iri the various countries, etc. are taken into consideration for deciding the exchange rate.