What an Exchange Rate Is — Exchange Rates | IGCSE Economics

Exam Frequency Analysis

Past paper frequency (2018 to 2024)

This topic accounts for approximately 11% of your exam marks.

increasing

Medium

Increasing11%

Exchange rate definitions, depreciation/appreciation effects on exports, imports, and inflation are increasingly examined since 2021.

An exchange rate is the value of one currency stated in units of another. It tells you how many units of one currency you get for one unit of another.

A few examples of typical quotations:

£1 = $1.25 (one pound buys $1.25)
€1 = £0.86 (one euro buys 86 pence)
$1 = ¥150 (one US dollar buys 150 Japanese yen)

The exchange rate matters because it determines:

How much foreign goods cost when imported.
How competitive domestic goods are when exported.
The value of foreign holidays, investments and remittances.
The size of any foreign-currency debt a country owes.

Exchange rates can be measured against a single foreign currency (a bilateral rate), or as a weighted average against a basket of trading partners' currencies (an effective exchange-rate index).