A rate It is a coefficient that expresses the link between two magnitudes. Change , meanwhile, is to substitute one thing for another.
The notion of exchange rate , which can also be mentioned as exchange rate , It refers to how much of a coin X can be acquired with a coin Y . That is, how many Argentine pesos do I need to buy a dollar, or how many bolivars will I have to deliver to receive a euro, for example.
It is, therefore, the relationship would change that exists between the two coins countries . The exchange rate can be real or nominal. He real exchange rate indicates the relationship that exists when an individual wants to exchange products or services between two nationswhile the nominal exchange rate , is the direct link between one currency and another foreign.
Examples of nominal change
The nominal change is expressed in terms of the currency In order to simplify the concept, we could say that it is the quantity of units that need to be delivered in order to obtain a unit of a particular foreign currency or how many units of the national currency are obtained when delivering a quantity of the foreign one. This value changes over time; The worse the economic situation of a country, the higher this change will be.
Expressed in values, if for example to obtain a euro it is necessary to deliver 5 Argentine pesos, the nominal exchange rate between countries or regions, in this case Argentina ($) and the European Union (€), is 5 $ / € . To know how much will be obtained from a given quantity of pesos must be multiplied by the exchange rate. If we had for example € 100 and sold them for the change of $ 5 / €, we should perform the following operation € 100 * $ 5 / € and get $ 500. Otherwise, the amount of pesos would be divided by the exchange rate: $ 1000 / $ 5 / € = $ 1000 * € 1 / $ 5, which would return us € 200.
We must also talk about two important concepts:
* Real appreciation: refers to the variation of goods of a country with respect to foreigners, becoming more expensive, whose consequence is the fall in the real exchange rate;
* Real depreciation: occurs when the opposite occurs, the goods of one country become cheaper compared to those of another, the price of goods in that other country rises and its consequence is the rise in the real exchange rate.
Another term related to this concept is that of representative exchange rate of the market which is usually presented with the acronym TRM and is the official indicator of comparisons between regional and foreign currencies; East value It is calculated taking into account the sales and purchase operations carried out in the international financial sector and which must be respected within the territorial borders.
Institutions that regulate the exchange rate
He central bank of each country is the institution that regulates the exchange rate system. In this way, there may be a fixed exchange rate , where the Central Bank decides the price of the currency and it could not vary (that was the case of Argentina during the time of convertibility, in which a peso was worth a dollar). Another possibility is the floating or flexible exchange rate , where the price of the currency is released to the game of supply and demand.
It is even possible for the Central Bank to choose a floating exchange rate that develops interventions to maintain the value of the currency within certain parameters. If the price of the foreign currency in question falls too low, the Central Bank starts selling to increase the supply; in the opposite case, the Central Bank is engaged in acquiring to avoid large increases.
Finally we can talk about Forex Market, which is the name received by the international institution where currency exchange operations are carried out; It involves private and institutional investors, central banks around the world, and other entities related to the movement of money in the world.