Macro Economics: Exchange Rates

  • Updated November 3, 2020
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The topic of the assignment is “Exchange rates”. “Price of one currency expressed in respect of another currency is called exchange rate”. It has 2 parts: That is domestic currency and foreign currency. Often exchange rates are quoted against the foreign currency that is the US Dollar. Regularly trade rates are cited against the remote money that is the US Dollar.


Price of one currency expressed in terms of another currency is called exchange rate. An exchange rate has 2 currencies. They are base money and counter cash. The foreign currency is base money and the counter cash is the domestic currency in case of direct quotation. In case of indirect quotation this is reverse. The vast majority of the trade rates utilize outside money as the base cash. Eg: US Dollar

The utilization of outside monetary forms in exchange is called Remote exchange. It is resolved in the outside trade showcase, which is where distinctive monetary standards are exchanged. € can be estimated as the measure of outside money that we can be purchased with one unit of local cash .

e = foreign currency/domestic currency

A fall in the cost of a money with respect to another cash is called deterioration. An expansion in the cost of one cash when contrasting and another money is called an appreciation. Certain nations decreases the cost of their cash. It is called Cheapening. When a nation raises the cost of their cash it is called Revaluation.

There are two types of exchange rates. They are Real exchange rate and Nominal exchange rate.

Nominal exchange rate is the relative price between domestic currencies and foreign currencies. In Foreign exchange (FX) markets there are two types of nominal exchange rates notations.

The Price notation, which is used by the central banks, US FED or Bank Of India.

Quantity notation, which is used by European Central Bank or Bank Of England.

  • In price notation, the goods are represented by foreign currency, and the price of the good is the exchange rate et. There is an inverse relationship between the movement of exchange rate et and the value of Indian rupee.
  • When Indian Rupee appreciates it leads to decrease in exchange rate and when Indian rupee depreciates it leads to increase in exchange rate.
  • They are inversely related with each other.

Real Exchange Rate do not measure the value of currencies, but they measure the relative price of domestic currency and foreign currencies. Real Exchange rate measure the real purchasing power of the currency of a country for a representative They measure the real purchasing power of a country’s currency for a representative baskets of goods and services.

Real exchange rate = Et * Pf / Pd

Where Et= Nominal exchange rate, Pf= price of foreign market, Pd= price of domestic market
There are mainly three types of exchange rate. They are Fixed Exchange rate or pegged , Flexible exchange rate and managed float exchange rate.

In Fixed exchange rate, the rate at which dollars can be converted to different currencies like yen, pesos etc is specified by Government. It is not fluctuating in nature. It provides stability in movements in capital and foreign trade. Inorder to achieve stability what the government does is, they buy foreign currency when the exchange rate is weak and sells the foreign currency when the exchange rate becomes stronger.

In Flexible exchange rate or floating exchange rate, Here the exchange rates are determined by demand and supply in the market where foreign currencies are traded. It is also called Floating Exchange rate. The Government doesn’t involve in determining the exchange rate like that in fixed exchange rate system.

Managed Floating Exchange rate is adopted by many countries by the end of Bretton Wood’s system. In managed floating exchange rate, exchange rate is determined by the forces of demand and supply in the market and also it is determined by government intervention. It is combination of both fixed exchange rate and floating exchange rate. It can also called as Dirty floating.

Macro Data

In the graph , it is seen that in the year 2018,the value of Indian rupees is diminishing and the value of US Dollar is Increasing. We can see that by November the value of US Dollar is increasing.

Here it is seen that the graph is not stable. It is fluctuating .In January, the value of Hongkong dollar is less, but it is Increasing. During march to July it is somewhat showing a stable rate even though it is slightly increasing and decreasing. During September the value of US Dollar is decreasing. And by November it again increases.

The value of Japanese yen is decreasing in January. But in march it is growing. Then from may to November it is again decreasing at a slow pace.

In the above graph, the value of euro is decreasing when compared to US Dollar. In march the value of US dollar is declining. And from may to November the value of US Dollar increases.

The above graph shows the trends in Rupee Dollar exchange rate. We can see that as time passes the value of Indian Rupee is diminishing and the value of US Dollar is increasing. During 1970-1987 the value of INR is stable. And then it is fluctuating.

Further Readings

“Floating exchange rates can cause big trouble” is an article in Bloomberg written by Peter Coy. According to IMF, financial maturity can be gained when a country determine exchange rate through demand and supply. It is advisable to adopt floating exchange rate by the market countries across the globe. Usually the floating exchange rate is considered to be the best among all but this paper is against that opinion. Although it is a symbol of mature economy, this paper is of the opinion that most of the benefits are not actually existing it is just overstated.

“Non linear exchange rate models; A selective overview” is an article by Lucio Sarno. It was published on may 1 2003. This paper helps us in understanding the exchange rate behaviour. There are two questions that are noticed. The first is whether purchasing power parity puzzles can be resolved by autoregressive models of real exchange rate and the next question is whether non linear models of nominal exchange rate can overcome random walk model. In this paper, with reference to different forecast accuracy criteria importance of evaluation of exchange rate is also determined.

Stock markets and the genuine exchange rate : An intertemporal approach” is an article composed by Benoit Mercereau and it was distributed on may 1 2003. This paper shows a nation with securities exchanges, where genuine conversion scale is resolved. It likewise decides the portion of dangerous resources and the hazardous resource costs. It indicates how statistic factors oe dangerous resources impact genuine conversion standard. It is negating with the Balass samuelson impact.

“The effects of exchange rate fluctuationson output and prices: evidence from developing countries” is written by Magda E Kandil and it was published on October 1 2003. This paper shows how fluctuations of exchange rate is affected by taking the price level of developing countries including 33 of them. The movements in exchange rate includes two components that is anticipated and unanticipated components. In unanticipated movements aggregate supply is determined by cost of goods sold and aggregate demand is distinguished by demand for domestic currency, imports and exports.

“Expectations and exchange rate dynamic” is a diary composed by Rudiger Dornbusch. Under predictable desires, flawless capital versatility this paper presents a hypothesis on exchange rate. A way is presented and exchange rate is deteriorated because of money related development.

“Monetary Policy and Exchange Rate Volatility in a Small Open Economy” is an article by Jordi Galí and Tommaso Monacelli and it was published on 1 july 2005. In this paper it is shown that how the equilibrium dynamics can reduce to a simple representation in output gap and domestic inflation by exhibiting a small open economy of “Calvo sticky price model”. This paper is used to analyse the impact of macro economy of three alternatives, mainly domestic inflation, exchange rate peg and CPI based Taylor rules.

“Floating trade rates can cause enormous inconvenience” is an article in Bloomberg composed by Diminish Demure. As per IMF, a nation which decides their exchange rate through powers of Interest and Supply is indicating money related development. It is prudent to embrace skimming conversion scale by the market nations over the globe. Typically the gliding conversion scale is viewed as the best among everything except this paper is against that assessment. Despite the fact that it is an image of develop economy, this paper is of the assessment that the majority of the advantages are not really existing it is simply exaggerated.


“Price of a currency expressed in respect of another currency is called Exchange Rate”. Presently all nations utilize settled conversion scale framework or adaptable exchange rate framework. But China, Today all different nations have adaptable conversion scale. The fundamental weakness of drifting exchange rate is that it is fluctuating in nature. The estimation of money is very fluctuating. Amid prior period the majority of the market analysts gave significance for settled and adaptable exchange rate. Overseen exchange rate is utilized just at the remainder of Bretton wood’s framework.


  1. Economics- Paul A Samuelson , William D Nordhaus
  2. World Development Indicators
  3. X- Rates
  4. Google Scholar
  5. International Monetary Fund(IMF)
  6. NBER
  7. Bloomberg

Cite this paper

Macro Economics: Exchange Rates. (2020, Nov 03). Retrieved from https://samploon.com/macro-economics-exchange-rates/

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