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Exchange rate, also known as the "foreign exchange market or exchange rate", refers to the ratio of one country's currency to another's currency, which is the price of one currency to another.

An interesting story happened in a small town on the border between the United States and Mexico:

A tourist bought a beer for 0.1 pesos in a small town on the Mexican side, he paid 1 peso, and got 0.9 pesos back. He went to a small town on the American side and found that the exchange rate between the dollar and the peso was 1 dollar = 0.9 pesos. He exchanged the remaining 0.9 pesos for $1 and bought a beer for $0.1 to get $0.9 back. Back in a small town in Mexico, he found that the exchange rate between the peso and the dollar was 1 peso = 0.9 dollars. So, he exchanged $0.9 for 1 peso and bought a beer to drink, so that he could still drink in two small towns, always for $1 or 1 peso. In other words, he got a free beer.

Why do bachelors get free beer? This brings us to the issue of exchange rates in economics. In the United States, the exchange rate of the US dollar to the peso is 1:0.9, but in Mexico, the exchange rate of the US dollar to the peso is 1:1.1. So what exactly is the exchange rate?

Exchange rate, also known as the "foreign exchange market or exchange rate", refers to the ratio of one country's currency to another's currency, which is the price of one currency to another. Since the names of the currencies of various countries in the world are different and the value of the currency is not uniform, the currency of one country should stipulate an exchange rate for the currency of other countries, that is, the exchange rate.

The exchange rate plays an important role in international trade and is the most important adjustment lever in international trade. Generally speaking, the rise in the exchange rate of the local currency, that is, the depreciation of the local currency to the outside world, can play a role in promoting exports and suppressing imports; If the exchange rate of the local currency rises, that is, the ratio of the local currency to the outside world rises, it is conducive to exports and not conducive to imports. The exchange rate is closely related to the export of domestic goods and affects the international competitiveness of a country.

For example, the USD/CNY exchange rate is now roughly 6.57:1. What does this mean? For example, if the exchange rate of 100 yuan is 7.55, the price of the dress in the international market is 13.20 US dollars, and if the exchange rate mentioned above is 6.57, the price of the dress in the international market is 15.22 US dollars. It can be seen that in the international market, the price of commodities is inevitably related to the level of the exchange rate. If the price of commodities is low, the market competitiveness will be strong, and the export of such commodities will increase; Otherwise, exports of such commodities will inevitably decline. This is the role of exchange rates in international trade.

Reading this, the reader can't help but ask: how are exchange rates formed? Is the exchange rate fixed? So what are the factors that affect the exchange rate?

The reason why the currencies of various countries can be compared and can form a comparative relationship with each other is that they all represent a certain amount of value, which is the basis for determining the exchange rate.

Under the gold standard, gold was the standard currency. The monetary units of two countries on the gold standard can determine the price of each other, i.e., the exchange rate, according to the amount of gold they contain. For example, when the gold coin standard system was implemented, the weight of 1 pound sterling was 123.27447 grains, and the fineness was 22 karres of gold, that is, the gold content was 113.0016 grains of pure gold, and the United States stipulated that the weight of 1 dollar was 25.8 grains, and the fineness was 900 thousandths, that is, the gold content was 23.22 grains of pure gold. According to the comparison of the gold content of the two currencies, 1 pound = 4.8665 US dollars, and the exchange rate fluctuates up and down on this basis.

Under the paper money system, each country issues paper money as a representative of metal currency, and with reference to the past practice, the gold content of paper money is stipulated by law, which is called gold parity, and the comparison of gold parity is the basis for determining the exchange rate of the two countries. However, paper money cannot be exchanged for gold, so the legal gold content of paper money is often insignificant. Therefore, in countries with official exchange rates, the exchange rate is set by the national monetary authority (the Ministry of Finance, the Central Bank or the Foreign Exchange Authority), and all foreign exchange transactions must be carried out at this rate.

The exchange rate is not fixed, and there are many factors that affect the exchange rate, which are roughly the following factors: (1) Balance of payments. If a country's balance of payments is in surplus, the exchange rate of that country's currency rises; If there is a deficit, the exchange rate of the country's currency falls. (2) Inflation. If inflation is high, the country's currency exchange rate is low; If the inflation rate is low, the country's currency exchange rate is high. (3) Interest rates. If a country's interest rate increases, the exchange rate is high. (4) Economic growth rate. If a country has a high economic growth rate, the country's currency exchange rate is high. (5) Fiscal deficit. If a country has a large budget deficit, its currency exchange rate will fall. (6) Foreign exchange reserves. If a country's foreign exchange reserves are high, the country's currency exchange rate will increase. (7) Investors' psychological expectations. The psychological expectations of investors are particularly prominent in the current international financial market. Exchange psychology believes that the foreign exchange rate is a concentrated embodiment of the subjective psychological evaluation of currency by both foreign exchange supply and demand. If the evaluation is high and the confidence is strong, the currency appreciates. This theory plays a crucial role in explaining the fluctuations in the exchange rate of countless short or very short termes. (8) The impact of exchange rate policies of various countries.

All in all, the exchange rate is a "double-edged sword" for any country. The benefits and disadvantages of exchange rate movements depend on the specific circumstances of a country. In international trade, the exchange rate, as long as there is a slight fluctuation, will directly affect the import and export trade. Therefore, if a country wants to maintain stability in international trade, it must first stabilize the exchange rate.