| The main role of the exchange rate is to allow | | | | monetary protectionism. |
| international regulations related to international trade: | | | | To prevent this form of protectionism that countries |
| an exporter wants to be paid in foreign currency, | | | | may agree on a system of fixed exchange rates - |
| because they need currency to pay its employees or | | | | such as the Bretton Woods (1944-1971) or the |
| its suppliers, while the importer does not have a priori | | | | European Monetary System (1979-1992). |
| that its own currency to pay. Every time there is an | | | | But some economists point out that a flexible |
| international commercial transaction, there will be a | | | | exchange system allows you to balance trade. The |
| foreign exchange transaction. | | | | reasoning is based on the functioning of the foreign |
| The exchange rate fluctuations will affect the prices | | | | exchange market. If a country has a deficit in its |
| of export goods. For example, if a product sold in | | | | current payments, this means that the country lacks |
| France and the USA is 100 €, with an exchange | | | | foreign currency to pay for purchases with the rest |
| rate of $ 1.25 per euro, therefore it will cost $ 125 | | | | of the world, and must be requested in the foreign |
| (100 x 1.25) to U.S. consumers . A decline in the | | | | exchange market which lowers the value of its |
| exchange rate at $ 1.10 per euro will drop the export | | | | currency in relation to other currencies. Accordingly, |
| price at 110 € (100 x 1.10), while a rise in the | | | | the exchange rate of the national currency down, |
| exchange rate will rise. Conversely, a well made in the | | | | which encourages exports and restricts imports, |
| USA, sold in France and worth $ 100, cost 80 € | | | | which, ultimately, the foreign trade balance. The |
| (100 / 1.25) to French consumers in the first case and | | | | mechanism is reversed in case of current account |
| 90.10 € (100 / 1.10) in the second case. Thus, any | | | | surplus. |
| decline in the exchange rate of the national currency | | | | This idea that fluctuations in the exchange rate alone |
| promotes exports and imports disadvantage, and | | | | could balance the trade has been highly criticized, if |
| vice versa for an increase in the exchange rate. So | | | | only because the exchange rate movements do not |
| there is a possibility for a country to improve its | | | | depend on that of international trade rules, and |
| balance of trade (and hence growth) if it gets a drop | | | | therefore a deficit may be accompanied by an |
| in the value of its currency. Countries that | | | | increase in the rate of change - as in the case of the |
| consistently under-estimate their currencies to | | | | USA in the 1980s or late 1990s. |
| facilitate their exports are accused of making | | | | |