What Is Money Exchange And Why Is It Needed?
When you're travelling to a foreign country and need to pay the cash
, the currency of your native country will be converted at current exchange rates. Money exchange rates are the values given to different types of currency at a given time and are important when travelling or doing business abroad.
The exchange rate of one country over another is the price of one unit of foreign currency in domestic currency terms.
The central bank of each country is responsible for defining the monetary system. You can choose an exchange rate fixed or variable:
Fixed: when the Central Bank of a country determines the value of its currency in reference to a foreign currency purchases and sales made at that price to hold it steady. Today's reference currency is the dollar. The problem of choosing a fixed monetary system is that the central bank has little ability to influence monetary policies to the development of the economy and that should keep the money exchange rate at the same price and cannot print money on a discretionary basis. The upside of such a scheme is restricted to the price expectations of currency and prices of tradable goods.
Variable: the relationship between national and foreign currency will be marked by the demand and currency exchange rates. For example if you increase the demand for dollars in a society, the currency will increase its value against the currency.
Another example: for the domestic currency appreciates the country should be attractive for investment and to attract foreign capital, which produces an increase in the supply of dollars.
Clean float variable: the country's monetary authority does not make interventions in the foreign exchange market.
Variable dirty float: when the monetary authority operates in the open market to set a trading band for foreign exchange. But there is also the nominal exchange rate, real and real multilateral.
Nominal: The number of currency units that we carry for a unit of foreign currency, conversely for sales. There are appreciations and depreciations in the nominal currency exchange rate. An appreciation of the currency occurs when we need less local currency to buy another, for example U.S. dollars. If we say that the national currency appreciated, the same as saying that the low exchange rate and vice versa.
Real: the real exchange rate of a country is the nominal money exchange rate relative price of goods in the foreign country in respect of local goods. Variations of the real exchange rate may be due to variations in the nominal exchange rate or changes in the prices of local goods and / or foreign.
Real depreciation is when our goods become cheaper compared to other goods. It actually raises the real exchange rate.
Real multilateral, are weighted real exchange rates of countries in the same proportion that represents our country's trade with individual country.
by: Runeshronald
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