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Indirect:
The price of domestic currency in terms of the
foreign currency.
Example: 0.68 euro per dollar.
EXCHANGE RATES
Nominal exchange rate or the exchange rate
is the price of one country’s currency in
terms of another country’s currency.
Example: Japan’s yen per U.S. dollar, India’s
rupees per euro.
When a U.S. consumer wants to buy a
Japanese camera it has two parts:
Price of camera in yen.
Price of yen in dollars.
If camera is worth 25,000 yen and yen is
worth $0.01, then dollar price for camera is
$250.
EXCHANGE RATES
Two types of changes in exchange rates:
Depreciation of home country’s currency
A rise in the home currency prices of a foreign
currency.
It makes home goods cheaper for foreigners and
foreign goods more expensive for domestic
residents.
Appreciation of home country’s currency
A fall in the home price of a foreign currency.
It makes home goods more expensive for
foreigners and foreign goods cheaper for
domestic residents.