Currency Terms

Although the effects can take time, changes in the exchange rate can have a big impact on the
economy and your own standard of living and purchasing power! There is often debate over whether
a country should have a high or low exchange rate. These discussions often revolve around the
current economic and political goals at the time. Let's explore the effects of changes in the exchange
rate and see how economic variables, such as inflation, the trade balance, GDP and exports &
imports, are affected.

To review quickly, an exchange rate is the rate at which one country's currency can be traded for
another country's currency. For example, in the United States, the dollar's strength is often judged in
relation to other currencies, such as the Japanese yen, the Swiss franc, and the euro. When a
currency appreciates, it means it increased in value relative to another
currency; depreciates means it weakened or fell in value relative to another currency.

When a dollar buys more than its equivalent in another currency, it's often labeled strong. When it
buys less than its equivalent, it's weak. For example the exchange rate as of August 2014 for the
American dollar vs. the Mexican peso is 13 to 1; a strong exchange rate! As of that same date, the
American dollar vs. the euro is 0.75 to 1; a weaker exchange rate.