Exchange Rate

Exchange Rate is the price of one country's currency in terms of another country's currency; the rate at which two currencies are traded for another. It measures the number of units of one currency which exchange, in the foreign exchange market for one unit of another. E.g.; suppose £1 exchange for $2 that is £1= $2 just as a commodity is sold and purchase in the market for some price. Exchange Rate is a confused term in international economics. To be more confident, first identify what currency you're talking about:

• The dollar's exchange rate = price of a dollar in terms of a foreign currency
• The foreign exchange rate = price of a foreign currency in terms of dollars

Best idea is there to avoid the word exchange rate is we can talk of currency appreciation and depreciation. Namely,

• A currency APPRECIATES when it increases in value (i.e., it becomes expensive, it purchases more foreign currency).
• A currency DEPRECIATES when it decreases in value (i.e., it becomes cheaper, it purchases less foreign currency).

To further avoid confusion, don't say "the exchange rate appreciates", say "the dollar appreciates."

Exchange rates are important because, they establish the relationships between the different currencies or monetary units of the world. Exchange rates have been instrumental in developing international trade. These have considerably increased the tempo of international investments. They provide a direct link between domestic prices of commodities and productive factors and their prices in the rest of the world. With the prices at home and abroad at a given level, a low rate of exchange will hamper imports and stimulate exports, and thereby tend to bring about a balance of payment surplus.  We have now a system of exchange rate management adopted by the RBI since 1994 and the FERA was replaced by FEMA in the year 2000.