If every nation used the same currency, international trade and travel would be a lot easier. Unfortunately, this is not the case. There are about 175 currencies in the world: Some you\u2019ve heard of, such as the British pound; others are likely unknown to you, such as the manat<\/em>, the official currency of Azerbaijan, a small nation in Southwest Asia. Let\u2019s pretend you suddenly find yourself in Azerbaijan and all you have with you is a credit card (which none of the restaurants or hotels will take) and U.S. dollars (which no one wants either). How can you get some Azerbaijani manats so you can buy a good meal and check into a hotel? If it\u2019s during the day, you\u2019re in luck. Head to the closest bank and ask someone there who speaks English to exchange your dollars for Azerbaijan manats. If you give the bank clerk $300 (all of your travel money), don\u2019t expect to get back 300 manats; the two currencies are not equal. To determine how much Azerbaijan money you\u2019ll get in exchange for your $300, the bank clerk will look up the day\u2019s foreign exchange rate<\/span><\/span>\u2014which tells you how much one currency is worth relative to another currency<\/em>. \u00a0If today were August 23, 2011, the clerk would find an exchange rate of 1 U.S. dollar equals .79 manats (which means that you get 79 manats for every dollar you give to the bank clerk). In other words, when you hand the clerk your $300 you\u2019ll get back only 235 manats (.79 \u00d7 $300).<\/p>\r\n Most likely, the deal does not sound good to you, but you have no choice\u2014that\u2019s what the exchange rate is. Plus, you\u2019re lucky that it\u2019s during the day and the banks are open: sleeping outside in Azerbaijan with an empty stomach doesn\u2019t sound like fun, although it would give you time to wonder what would happen if an Azerbaijani traveled to the United States. When the traveler goes to exchange manats for U.S. dollars, he or she will get back $1.27 for each manat. Exchanging 300 manats for U.S. dollars yields $381 in U.S. dollars (1.27097 \u00d7 $300). Well, this doesn\u2019t sound fair. Why did you receive fewer manats for your U.S. dollars while the Azerbaijan traveler received more dollars for his or her manats? It is because the U.S. dollar is weak relative to the Azerbaijan manat. There are many reasons for the weakness of the U.S. dollar, but one possible culprit is the huge $14 trillion debt (and rising) carried by the United States. And if you are looking for things to get upset about, your share of this huge U.S. debt is about $47,000 (and rising).<\/p>\r\nhttps:\/\/youtu.be\/u3fVXWtDm6k\r\n\r\nNow, we\u2019ll look at two business examples. First, let\u2019s say that your business is importing watches from Switzerland. Because the watchmaker will want to be paid in Swiss francs, you have to figure out how many U.S. dollars you\u2019ll need to buy the francs with which to pay the watchmaker. You\u2019d start by finding out the exchange rate between the Swiss franc and the U.S. dollar.\r\n\r\nYou could simply look in a newspaper or go to any number of websites\u2014say, http:\/\/www.oanda.com<\/a>\u2014to get the current exchange rate. To keep things simple, let\u2019s assume that the exchange rate is 1 Swiss franc = U.S. $1.27 (i.e., 1 Swiss franc is worth $1.27). Let\u2019s also assume that you owe the Swiss watchmaker 1,000 francs. Doing some quick math, you figure that it will take $1,270 to buy 1,000 francs (1,000 francs \u00d7 the exchange rate of 1.27 = $1,270).\r\n\r\nNow let\u2019s say that you don\u2019t have the cash flow to pay the watchmaker for two weeks. When you check the exchange rate two weeks later, you find that it has gone up to 1 Swiss franc = $1.37. Are you better off or worse off? It\u2019s easy to check: 1,000 francs \u00d7 the new exchange rate of 1.37 = $1,370. You\u2019ve just learned the hard way that when the value of the franc relative to the dollar goes up, it costs you more to buy something from Switzerland. You probably can\u2019t help but wonder what would have happened if the value of the franc relative to the dollar had gone down<\/em>\u2014say, to $1.17 per franc. At this rate, you\u2019d need only $1,170 to pay the 1,000 francs (1,000 \u00d7 1.17). In other words, when the value of the franc relative to the dollar drops, it costs less to buy goods from Switzerland. In sum you\u2019ve learned the following:\r\n If every nation used the same currency, international trade and travel would be a lot easier. Unfortunately, this is not the case. There are about 175 currencies in the world: Some you\u2019ve heard of, such as the British pound; others are likely unknown to you, such as the manat<\/em>, the official currency of Azerbaijan, a small nation in Southwest Asia. Let\u2019s pretend you suddenly find yourself in Azerbaijan and all you have with you is a credit card (which none of the restaurants or hotels will take) and U.S. dollars (which no one wants either). How can you get some Azerbaijani manats so you can buy a good meal and check into a hotel? If it\u2019s during the day, you\u2019re in luck. Head to the closest bank and ask someone there who speaks English to exchange your dollars for Azerbaijan manats. If you give the bank clerk $300 (all of your travel money), don\u2019t expect to get back 300 manats; the two currencies are not equal. To determine how much Azerbaijan money you\u2019ll get in exchange for your $300, the bank clerk will look up the day\u2019s foreign exchange rate<\/span><\/span>\u2014which tells you how much one currency is worth relative to another currency<\/em>. \u00a0If today were August 23, 2011, the clerk would find an exchange rate of 1 U.S. dollar equals .79 manats (which means that you get 79 manats for every dollar you give to the bank clerk). In other words, when you hand the clerk your $300 you\u2019ll get back only 235 manats (.79 \u00d7 $300).<\/p>\n Most likely, the deal does not sound good to you, but you have no choice\u2014that\u2019s what the exchange rate is. Plus, you\u2019re lucky that it\u2019s during the day and the banks are open: sleeping outside in Azerbaijan with an empty stomach doesn\u2019t sound like fun, although it would give you time to wonder what would happen if an Azerbaijani traveled to the United States. When the traveler goes to exchange manats for U.S. dollars, he or she will get back $1.27 for each manat. Exchanging 300 manats for U.S. dollars yields $381 in U.S. dollars (1.27097 \u00d7 $300). Well, this doesn\u2019t sound fair. Why did you receive fewer manats for your U.S. dollars while the Azerbaijan traveler received more dollars for his or her manats? It is because the U.S. dollar is weak relative to the Azerbaijan manat. There are many reasons for the weakness of the U.S. dollar, but one possible culprit is the huge $14 trillion debt (and rising) carried by the United States. And if you are looking for things to get upset about, your share of this huge U.S. debt is about $47,000 (and rising).<\/p>\n\r\n \t
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Reflection Questions<\/h2>\r\n
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Check Your Understanding<\/h2>\r\nAnswer the question(s) below to see how well you understand the topics covered in this section. This short quiz does not<\/strong> count toward your grade in the class, and you can retake it an unlimited number of times.\r\n\r\nUse this quiz to check your understanding and decide whether to (1) study the previous section further or (2) move on to the next section.\r\n\r\nhttps:\/\/assessments.lumenlearning.com\/assessments\/166","rendered":"
The Ups and Downs of\u00a0Currency Valuations and Exchange Rates<\/h2>\n