Balance of Payments and Foreign Exchange Rate — Part 2: The Foreign Exchange Rate: visual lesson, ISC Class 12 Economics

Lesson

The Foreign Exchange Rate

Part 2 — the price of foreign currency, who sets it, and how demand and supply move it.

In this lesson you will

Explain the meaning of the exchange rate and compare fixed and flexible systems
Show how demand and supply of foreign exchange determine the rate, and the effect of shifts
Distinguish depreciation, appreciation, devaluation and revaluation

Part 2 at a glance

Concept

The exchange rate is the price of one currency in terms of another, for example rupees per US dollar.

Table of sources of demand for US dollars (imports, travel and study abroad, investment abroad, repaying foreign loans) and of supply (exports, foreign tourists, foreign investment at home, remittances)
Demand for US dollars (outflows)	Supply of US dollars (inflows)
Imports of goods and services	Exports of goods and services
Travel and study abroad	Foreign tourists
Investment abroad	Foreign investment at home
Repaying foreign loans	Remittances from workers abroad

Check your understanding

A board shows "1 US dollar = 50 rupees" (imagined). What is this figure?

Multiple choice1 mark

A money-changer's board at an imagined Amritsar bus terminal shows "1 US dollar = 50 rupees" (an imagined rate). This figure is the