Question

Identify two world currencies. To demonstrate variances in exchange rates, show the comparative value of the two currencies in 2000, 2010 and March 1, 2019 (value of one currency relative to the other). How have they changed over time? What are some reasons why?

*Please answer in DETAIL*

Answer 1

Variances in exchange rates can be due to many reasons such as :

Purchase parity, Cost of living, Foreign Exchange reserve of the countries, Foreign Trade i.e., Import and export of the country, Government policies, trade barriers etc.

However, the major factor of fluctuation in currency prices are due to forces of demand and supply. The excess supply of one currency will reduced their price, however shortage of other currency will increase their demand and that leads to increase in price of the such other currency

Example, due to increased in foreign imports in India from USA, the importers have to sell their Indian Rupees (INR) in hand to buy US Dollars (USD) from exchange market to pay the vendor from USA. This leads to supply of INR and on other side increase in demand of USD. By applying the concept of demand and supply, the prices of INR will fall down as and when the supply of INR increases in foreign exchange market and the prices of USD will increase as and when there is a demand of such USD in foreign exchange market, and vice-verse.

Following are actual data of currency price and export trade

1. Increase in Import in India

2. Decrease in Vaue of INR as compared to USD

Year	Average rate per year
2000	43.33
2010	44.5
2011	44.72
2012	55.85
2013	60.19
2014	59.78
2015	63.73
2016	66.91
2017	63.81
2018	72.55
2019	69.36