Exchange rates Cambridge IGCSE Economics revision
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In plain words
To buy something from another country you first have to buy that country's money. The exchange rate is what it costs: the price of one currency in terms of another.
Like any price, it is set by demand and supply, in a market called the foreign exchange market.
6 things to know
- An exchange rate is the price of one currency in terms of another.
- With a floating exchange rate, the rate is set by the demand for and supply of the currency.
- A currency is demanded by foreigners who want to buy the country's exports, visit it as tourists, invest in it or save in its banks.
- A currency is supplied by residents who want to buy imports, travel abroad or invest abroad.
- Demand rises, and the currency gains value, when exports rise, when interest rates rise (which attracts savings from abroad), or when speculators expect it to go up.
- Currencies are also bought and sold to pay profits, interest and dividends between countries, and when workers abroad send money home.
Worked example
More foreign tourists decide to visit Thailand. What happens to the value of the Thai baht?
- Tourists need baht to spend in Thailand, so they buy it with their own currencies.
- The demand for baht increases.
- With a floating exchange rate, the price of the baht rises.
Tips and tricks
- Exports create demand for a country's currency. Imports create supply of it. Fix that in your mind and the rest follows.
- Speculators buy a currency if they think it will rise, so that they can sell it later for more. Their buying itself pushes the rate up.
It lands in your notebook with its questions as flashcards.
Exchange rates: 5 questions and answers
These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.
An exchange rate is
It tells you how much of one currency you get for another.
What determines a floating exchange rate?
It is a market price.
Foreign demand for a country's exports rises. What happens to the demand for its currency?
Foreign buyers need the currency to pay for the exports.
Which would increase the supply of a country's currency on the foreign exchange market?
They sell their own currency to buy the foreign currency they need.
Speculators expect a currency to rise in value. What are they likely to do?
They buy now, hoping to sell at a higher price later.
Quiz
5 questions
Tap an answer and you’ll see straight away whether it’s right, and why.
Worksheet
3 questions, 8 marks. Write your answers on paper, then check them.
Exchange rates
Cambridge IGCSE Economics 0455 · 8 marks · papermunch.org
Name ______________________________ Date ______________
Define a foreign exchange rate.[2]
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The price of one currency expressed in terms of another currency.
Explain why a rise in a country's interest rates may raise the value of its currency.[3]
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Higher interest rates attract savings from abroad. Foreigners must buy the currency to save in the country's banks, so demand for the currency rises and its price goes up.
A country's consumers buy many more imported goods. Explain the effect on its floating exchange rate.[3]
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To pay for imports they sell their own currency to buy foreign currency. The supply of the home currency rises, so its value falls.
Answers: Exchange rates
- 1. The price of one currency expressed in terms of another currency.
- 2. Higher interest rates attract savings from abroad. Foreigners must buy the currency to save in the country's banks, so demand for the currency rises and its price goes up.
- 3. To pay for imports they sell their own currency to buy foreign currency. The supply of the home currency rises, so its value falls.