Foreign exchange rates
G3 Economics - syllabus K343, 2027
What exchange rates are, how a floating rate is determined, why it changes, and how it affects exports and imports.
- What an exchange rate is and why currencies are traded
An exchange rate is the price of one currency in terms of another; currencies are bought and sold for trade, investment and speculation.
- How a floating exchange rate is determined
In a floating system, the exchange rate is set by the demand for and supply of the currency.
- Why exchange rates change
Exchange rates change when demand for exports or imports changes, when interest rates change, or when speculators act.
- Effects of exchange rate changes on exports and imports
An appreciation makes exports dearer and imports cheaper; a depreciation makes exports cheaper and imports dearer.
- Put it together: Choose the currency's direction
A central bank can influence whether its currency rises or falls in value this year. Compare the effects on different groups.
What you will be able to do
I can define a foreign exchange rate.
Syllabus K343, 6.3.1. Definition of foreign exchange rate
Taught in What an exchange rate is and why currencies are traded
I can explain why people and governments buy and sell foreign currencies.
Syllabus K343, 6.3.2. Reasons for buying and selling foreign currencies: trade in goods and services; speculation; government intervention in currency markets; payment of profit, interest and dividends between countries; workers' remittances; investment in capital goods between countries
Taught in What an exchange rate is and why currencies are traded
I can define floating rates, appreciation and depreciation, and explain how demand and supply set an exchange rate.
Syllabus K343, 6.3.3. Determination of foreign exchange rate in foreign exchange market: definitions of floating exchange rate, appreciation and depreciation; the demand for and supply of a currency; the determination of the equilibrium foreign exchange rate; causes of foreign exchange rate fluctuations, changes in demand for exports and imports, changes in the interest rate, speculation
Taught in How a floating exchange rate is determined, Why exchange rates change
I can explain how a change in the exchange rate affects the prices of and demand for exports and imports.
Syllabus K343, 6.3.4. Consequences of changes in foreign exchange rates: effects of changes in foreign exchange rates on prices and demand for exports and imports
Taught in Effects of exchange rate changes on exports and imports