Nominal exchange rate

economic-dictionary

The nominal exchange rate of a currency pair is the amount of money obtained per unit of the reference currency.

The nominal exchange rate is a very simple concept. The first thing we must know to properly understand the concept is that there are many different currencies in the world. In other words, each geographical area operates with a currency. For example, in Indonesia it is traded with the rupee, in Russia with the Russian ruble, in the United States with the US dollar and in the euro area with the euro. We could go on with many more examples, but it is clear that there are many different currencies.

In this way, when we are going to buy a good in a country with another currency, we must make a conversion. That is, if I have Chilean pesos and I go to China on vacation, in order to buy there, I will have to exchange my Chilean pesos for Chinese yuan. Of course, as usual, a question arises, how many Chinese yuan will they give me for each Chilean peso? The answer to this question is in the currency market, also known as the forex market.

The quotation of a currency pair in the forex market

The currency market or forex market is a decentralized market in which the nominal exchange rate is set. As in any other market, the nominal exchange rate is set based on supply and demand. In such a way that if one currency is in demand more than another, it will appreciate. Likewise, if the supply of one currency increases more than the supply of another, it will depreciate.

Now, the important thing to understand what an exchange rate is, is not to understand the movements. Understanding why currencies fluctuate is more advanced. Before that, there is something much more important. It is about how to read a currency in the markets.

In the foreign exchange market the nomenclature is as follows:

Base Currency / Quote Currency

An example is the euro against the dollar. The nomenclature of the euro against the dollar is:

EUR / USD

The base currency is the euro and the quote currency is the dollar. That is the nomenclature used in the markets. If we said USD / EUR it would be exactly the same but with the reverse quote. Now, in the markets we will only see one price: EUR / USD. The way to read it is euro against the dollar or euro-dollar.

Currency conversion

At Economipedia we have a currency converter. You can calculate it automatically, however, it is always better to know how it is calculated. To learn how to convert currencies, we are going to see two examples:

EUR / USD price: 1.32

If the price on the currency market of the EUR / USD is 1.32, it means that for each euro they will give us 1.32 dollars. That is, the figure at which the pair is traded is the amount of quote currency for each unit of base currency.

USD / JPY price: 130.02

The above quote indicates how much we will receive for each dollar. That is, we will receive 130.02 yen for every dollar.

Now suppose we want to do the opposite operation. That is, we have dollars and know how many euros they will give us for each dollar.

EUR / USD price: 1.25

All we have to do is get the opposite currency pair. To obtain it we must do a very simple operation. We only have to divide one by the quote. In this case 1 / 1.25 = 0.8 USD / EUR. Which means that for every dollar, they will give us 0.8 euros.

USD / JPY quote: 128.03

We perform the same operation and we obtain that 1 / 128.03 = 0.0078 JPY / USD. For every Japanese yen, they will give us $ 0.0078.

Real exchange rate Fixed exchange rate

Tags:  bag history comparisons 

Interesting Articles

add