June 10, 2023 

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Trading Some Ideas On EXCHANGE RATES

One potential problem with any far and wide ambling tour of the economy is ambling too far or too wide. Such is the case as we find ourselves in the quaint and courteous Republic of Northwest Queoldiola. While we're here, let's take the opportunity to explore the quaint and courteous economy of the Northwest Queoldiola. Our impromptu economic expedition is faced with an immediate roadblock. I have a pocket filled with good old U. S. dollar bills, but the quaint and courteous people of Northwest Queoldiola don't trade their wares for good old U. S. dollar bills. They prefer the quaint and courteous Northwest Queoldiolan currency, the queold. All we need to do is trade my good old U. S. dollar bills for quaint and courteous queolds.

The Foreign Exchange Market to the Rescue

The place to do any exchanging of one currency for another is the foreign exchange market. While this isn't quite the same as heading down to the Mr. Market Super Food Discount Store for a chunk of cheddar cheese, many banks can accommodate you're desire to trade one currency for another. Our luck places us before the doors of the First National Bank of Northwest Queoldiola.

While we now know how to trade dollars for queolds, it would help if we knew how much. If we take one good old U. S. dollar into the First National Bank of Northwest Queoldiola, how many quaint and courteous queolds can we expect to get back? This question is answered by the exchange rate -- the price of one currency in terms of another. You might occasionally hear one of the network newsguys report, with a wry smile, that the exchange rates between U. S. dollars and yen, marks, or pounds have gone up, down, or stayed to same. If you're not into wry-smiling network newsguys, most major newspapers regularly print currency exchange rates.

For our little excursion, let's note that the exchange rate between dollars and queolds is 29.2 million queolds per dollar. In that I have $137.65 in my pocket, I can trade my good old U. S. currency for 4,019,380,000 queolds.

Let's consider who else might be interested in trading one currency for another.

Travelers and Coin Collectors

Northwest Queoldiola is certainly a quaint and courteous country, and a tourist mecca for all travelers seeking quaint and courteous countries. Those travelers would clearly need to exchange dollars for queolds. But if you're not into quaint and courteous and don't intend to travel beyond the boundaries of the good old U. S. of A., is there any good reason to have an interest in the foreign exchange market or the exchange rate?

We can quickly dispense with the obvious interest of coin collectors, and jump right into the importance of the exchange rate to the average, overworked, underappreciated members of the third estate. The exchange rate has a direct effect on the trade that occurs between nations. To see why, it's best to think about the exchange rate as the price of a currency. The "price" of a dollar in our example is 29.2 million queolds. The price of currency is important because it affects the relative prices of the goods that countries buy and sell.

  • If the price of a nation's currency goes up (for example, a dollar increases to 30 million queolds), then that nation is likely to export fewer goods and import more. In terms of queolds, U. S. products are now more expensive, so U. S. exports to Northwest Queoldiola drop. However, in terms of dollars, Northwest Queoldiolan stuff is cheaper and their imports into the United States rise.

  • If the price of a nation's currency goes down, then you can reverse everything -- exports go up and imports go down.

    All of this importing and exporting comes home to the average, overworked, underappreciated members of the third estate.

  • Exports create jobs. When the United States exports more stuff to other countries, then more people have jobs. Therefore, a higher exchange rate can eliminate jobs while a lower exchange rate can create jobs.

  • Imports give consumers satisfaction. When the United States imports more goods, more cheaply because of the higher exchange rate, it has more satisfied consumers. If those imported goods are eliminated, then consumers aren't as happy.

A higher exchange rate would increase your satisfaction from consuming imports, but you would lose your job in the process. A lower exchange rate tends to reduce your satisfaction, but expand your job opportunities. Like a lot of stuff in the economy, there aren't any obvious, clear-cut, once-and-for-all, ideal options for the exchange rate.

Here are a few tips to consider if you want to keep track of exchange rates:

Exchange Rate Tips

  • If you're not in an exporting industry (like cars or farm products), but you consume a lot of imported goods (like chocolate and Japanese electronics), then a higher exchange rate is best for you.

  • If, however, your livelihood depends on consumption by people in other countries, and you only buy good old America products, then a lower exchange rate is your ticket to happiness.

If you're the sort of person who keeps track of who's winning the global race for number one on the economic front, then exchange rates can help. In general, a country that is healthy, growing, and prosperous, with low rates of inflation tends to have a strong currency that's in great demand. This translates into a rising exchange rate. In contrast, no one is likely to demand the currency of an also-ran country that's ailing and stagnant. It's exchange rate will tend to fall.

If the United States is growing faster than the Republic of Northwest Queoldiola, then the price of dollars in terms of queolds will tend to rise. One dollar will get you more queolds and a billion queolds will get you fewer dollars.

Who's In Charge Here?

Exchange rates are market prices, and like other prices they bounce around from competitive forces -- or the lack thereof. In particular, it's worth noting major participants in the foreign exchange market. They are:

  • Everybody else.

  • Governments.

If the "everybody elses" buy and sell currencies, then the foreign exchange markets tend to be competitive markets because there are a lot of "everybody elses" out there. Governments of the world, however, are never too far away from activities in the foreign exchange market. That's because (1) they're in charge of their currencies -- they print the money that's being traded -- and (2) the exchange rates have a big impact on exports and imports, which affect the health and stability of an economy and consequently the likelihood that government leaders stay in power.

As such, governments tend to let the everybody elses of the world do their buying and selling, except when the exchange rates go up or down too much. What's too much? It depends. If the exchange rate goes up in a country that's importing a lot and exporting very little, then their government is likely to jump into the foreign exchange market and start buying or selling currencies. The same rise in the exchange rate would probably pass with no action if the country is doing very little importing and a lot of exporting.

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