The entire world's economic system depends upon the exchange rate. For this reason, it is very important you learn how it works. How the currency exchange rates effect global business is like a thermometer, it measures the health of global economics.
First, you must understand by definition what the exchange rate is. It is the value of one nation's currency in comparison to another or to put it another way, if you took one U.S. dollar to Canada, would you be able to buy more than one item at a Dollar Store or not even one item?
The laws of supply and demand dictate how the currency exchange rates effect global business with something called a floating exchange rate. A floating exchange rate means that currency values "float" or fluctuate depending on how much supply is being demanded from that country in comparison to the other country with which it is doing business. It is the global market that dictates which country's dollar is worth the most.
Governments can play a part in how the currency exchange rates affect global business as well. Many governments will put into place certain actions that will purposely devalue their own dollar. Why would they do this? It seems counterproductive, but actually it isn't. By deflating the value of their own dollar, that country will cause an increase in the demand for their supplies, kind of like when a store puts on a sale and attracts a crowd to their store.
A few years ago, a struggling Brazil did just that, they devalued their currency. As a result they attracted a plethora of foreign investors to their country. Many foreign businesses invested in Brazil's retail market, manufacturing companies, construction, tourism, banking, communication companies and many other industries boosting Brazil's economic system. Today, Brazil is benefiting by this sudden burst in its economy and the quality of life is greatly improving there.
Now you can see how the currency exchange rates effect global business becomes very important to world trade. All of these things have an effect on you. Your investment accounts, your 401K, even your own job are all affected by the global economy. Exchange rates are very important in determining which country, even which businesses globally will have the competitive advantage.
The law of supply and demand state that when prices are low, people buy, when they are high, they do not. The same works for world trade. If Japan can buy the same product for less from Germany than it can from the U.S., Japan will buy from Germany and the U.S. has just lost its competitive advantage.
The next time you consider taking a vacation to a foreign country, think about the exchange rate in a way that is more than just how much vacation will you be able to purchase. Think about whose country has the higher value in their currency, because now you know what it means to you.
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