Question

Define exchange rate. Explain favourable and unfavourable exchange rate.

Answer 1

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Foregin Exchange Rate : - Foreign exchange rate refers to the rate at which one unit of currency of a country can be exchanged for the number of units of currency of another country. In other words , it is the price paid in domestic currency in other to get one unit of foreign currency. In other words exchange rate expresses the ratio of exchange between the currencies of two countries. Hence , exchange rate is the price of currency expressed in terms of another currency. (1) According to sayer , “ the price of currencies in terms of each other are called foreign exchange rate.” (II) According to Crowther , “ The rate of exchange measures number of units of one currency which is exchanged in the foreign market for one unit or another. Favourable and Unfavourable Exchange Rates : Exchange rate may be favourable or unfavourble. (A) In Domestic Currency : When exchange rate is experessed in terms of domestic Currency , then falling exchange rate will be favourable and increasing exchange rate becomes unfavourable. For example , let us assume that 1 Pound = Rs 80. If exchange rate decreases to Rs 78, it will be favourable for India because now we have to give less money for 1 Pound. On the contrary if 1 Pound = Rs 82 , exchange rate will be unfavourable for India because we have to give more money for one pound. (b) In foreign currency :- When exchange rate is expressed in terms of foreign currency, increasing exchange rate will be favourable for domestic currency and decreasing exchange rate will be unfavourable for the domestic country. For example: Suppose Rs 1 = 4 cent. If Rs 1 becomes equal to 5 cent, it will be favourable for our country as we will get 5 cent for Rs 1. On the contrary, if exchange rate becomes Rs 1 = 3 cent, then exchange rate will be unfavourable because now less goods could be purchased in lieu of Rs 1Read more on Sarthaks.com - https://www.sarthaks.com/271680/what-is-exchange-rate-explain-the-favourable-and-unfavourable-exchange-rate