Gujarat BoardEnglish MediumSTD 12 CommerceEconomicsFOREIGN TRADE5 Marks
Question
Write a detail note on the Exchange Rate.
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Answer
$1.$ Introduction:
When any country is carrying out international economic transactions, the problem of exchange rate arises because the currency of each country is different.
When an Indian tourist visits a foreign country and purchases goods, tourist has to obtain the currency of the concerned country.
He has to convert the currency.
Likewise the importer of India imports goods from foreign country will have to make payment in that particularly currency of the country.
He has to make payment of the product/service of the currency of the concern country.
All these things show why foreign exchange is required.
Normally tourists or traders have to get the currency of their country converted in to foreign international accepted currency.
This conversion is done through bank or legally recognized traders at specific rates.
This rate or currency conversion rate is known as exchange rate.
In short when product or service is exchanged the question of exchange rate arises.
Exchange between two currencies is not carried out till the rate of exchange between two currencies is fixed.
$2.$ Concept of Exchange Rate:
Exchange rate is known as the rate of which the currency of one country is converted in to the currency of another country.
In other words exchange rate means the price of the currency of one country expressed in the price of the currency of another country.
For a particular country exchange rate is the price of one unit of a foreign currency.
Example:
Indian citizen has to pay $Rs.60$ to buy $1\$$ here exchange rate is $\$1 = Rs.60$ means to buy $\$1$ he has to pay $Rs.60.$
Currency rate is a price. As the price of the product is fixed considering its demand and supply likewise exchange rate is one type of price of currency.
Demand of exchange determines the price of currency.
$3.$ Effect of variation in currency exchange rate:
Variation in currency exchange rate affects the values of the currency of the country.
If in context of Indian rupee the exchange rate of dollar in international market falls.
Suppose exchange rate is $\$1 = Rs.60$ is the existing rate and instead it reaches to $\$1 = Rs.65$ then a person could buy $1 \$$ for $Rs.60,$ now he has to pay $Rs.65$ to buy $\$1,$ which means the value of dollar rises and the value of rupee falls.
Vice versa, if the exchange rate falls for India, then the value of rupee in international market rises. Suppose exchange rate instead of $1\$ = Rs.60, 1\$ = Rs.55,$ earlier to get $\$1$ the importer had to pay $Rs.60$ now he has to pay $Rs. 55$ to get $\$1.$
It means that the value of rupee has increased.
In these circumstances the value of dollar $($foreign currency$)$ falls and the value of rupee rises.
$(1)$ Effect on Export:
If the exchange rate of foreign currency rises, then export increases e.g. Instead of $\$1 = 60 Rs., \$1 = 65 Rs.$ happens then Indian goods becomes cheaper which leads to increase in export.
Earlier a foreigner could buy $60$ units of f $1$ against $\$1,$ now he can buy 65 units.
When the reverse happens and exchange rate for India falls and our export becomes costlier it falls.
There is direct relation between exchange rate and export.
$(2)$ Effect on Import:
Exchange rate has relation with import.
When exchange rate goes high import is costlier.
So import decreases. e.g. Instead of $31:60 Rs., \$l=65 Rs.$ Earlier to buy $1$ unit $1\ 60$ was paid now $Rs. 65$ will be paid and import will be costlier.
As a result there will be fall in demand and import will decrease.
$(3)$ Effect on Price:
Internal price of a country is greatly affected by variation in exchange rate.
Varying rate of exchange affects import-export and indirectly it affects the prices of products in local market. E.g. In India, petroleum is imported in bulk.
If the exchange rate raises then indirectly its prices rise and petroleum based product/service is affected owing to higher production cost.
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