ECO 372 Foreign Exchange Rates

International Trade and Finance Speech

ECO 372 - Principles of Macroeconomics

One may try to understand what exactly a foreign exchange rate is. To help understand, let's view a foreign exchange rate as exchanging one dollar at a department store for a product. If one were to go into a department store and purchase a pair of socks in a three pack for one dollar, or each for 33 cents, one would be able to relate that the dollar-to-socks exchange rate is three socks because one exchanged a single dollar for three pairs of socks. Similarly, the sock-to-dollar exchange rate would be one-third of a dollar, meaning 33 cents. This is because if one decides to sell a single pair of socks, one would get 33 cents in exchange. (Moffatt)

The same principle...