Bilateral exchange rate

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A bilateral exchange rate (English: bilateral exchange rate ), the exchange ratio between two currencies. This ratio is the price of one currency expressed in another currency. The price is formed on the foreign exchange market . An exchange rate is always bilateral if it only takes two currencies into account. In contrast, when it comes to the multilateral exchange rate , we speak of the ratio to the currencies of a country's most important trading partners. A distinction is made between the nominal bilateral and the real bilateral exchange rate . The literature mostly only speaks of the nominal and real exchange rates.

Conceptual classification

Just as goods have a price, usually expressed in money, so do the currencies of different countries have their price expressed in the currency of another country.

In general, exchange rates are differentiated according to two criteria:

Both criteria are combined with one another (e.g. nominal bilateral and real bilateral exchange rates).

Exchange rate types

Nominal bilateral exchange rate

Nominal exchange rate between the euro and the US dollar

The nominal bilateral exchange rate is the price at which two currencies are exchanged and can be defined in two ways:

  • Quantity quotation indicates how many units of foreign currency you get for one unit of domestic currency (e.g. $ 1.58 for one euro).
  • Price quotation , on the other hand, indicates the price for a unit of foreign currency in domestic currency, i.e. the reciprocal value of the quantity quotation (e.g. € 0.63 for one dollar).

Since both definitions are correct, it is important to consciously work with a notation. After the introduction of the euro, in addition to the USA, the volume quotation was also used in Europe, before it was price quotation in Europe.

Real bilateral exchange rate

The real bilateral exchange rate (ε) is the price ratio of two goods in different currency areas. Here the price level is included in the calculation:

With

  • = nominal exchange rate
  • = domestic price level
  • = foreign price level

The real exchange rate represents an exchange ratio of goods / shopping baskets and is thus defined as an index. An index is provided with a freely selected value (usually standardized to 1 or 100) in a freely selected base year. As a result, the index itself is not meaningful. Only the change over time is informative. The determination is quite problematic because the determination of representative and internationally comparable shopping carts is very difficult.

Bilateral vs. multilateral exchange rates

In the case of currency-related changes in a country's international competitiveness, the consideration of bilateral exchange rates is often no longer sufficient. Rather, the multilateral exchange rate (also the effective exchange rate) becomes relevant. It applies not only to two countries, but to all international trading partners of a country.

Changes in exchange rates

A flexible exchange rate changes every minute as a result of the supply and demand behavior of market players ( investors and foreign traders ) on the foreign exchange market. In the system of fixed exchange rates , the central bank acts as another market player. The exchange rates in different currency markets instantly equalize through arbitrage deals .

A distinction is made between appreciation and depreciation in exchange rate changes :

  • nominal appreciation of the domestic currency - price of the domestic currency in units of foreign currency increases , in the case of volume quotation: increase in the exchange rate
  • Nominal devaluation of the domestic currency - the price of the domestic currency in units of foreign currency falls , in the case of volume quotation: decline in the exchange rate .

Real exchange rates also change over time:

  • Real appreciation of domestic goods - increase in the prices of domestic goods compared to the prices of foreign goods, in the case of volume quotation: increase in the real exchange rate
  • Real devaluation of domestic goods - decrease in the prices of domestic goods compared to the prices of foreign goods, in the case of volume quotation: decrease in the real exchange rate

For example, if the real exchange rate between the Eurozone and the US increases by 15%, it shows that European goods have become 15% more expensive compared to American goods.

Changes in exchange rates are influenced in the short term by technical chart expectations, but in the long term exchange rates are determined by fundamentals . The purchasing power parity theory compares the price level of tradable goods, the interest parity theory compares the interest rates.

Meaning and impact

In the case of free movement of goods, buyers can choose between domestic and foreign products. The real exchange rate, which represents the purchasing power of a currency, is relevant for these purchase decisions . A mere comparison of the nominal exchange rate is not sufficient for purchasing decisions. Only by including the price level can it be assessed where it is cheapest to buy. The decision criterion is how expensive domestic goods are compared to foreign goods. Here transport costs, customs duties, exchange and transfer fees must be taken into account. Changes in the real exchange rate over time lead to a change in a country's international competitiveness and have an impact on foreign trade (including the Marshall-Lerner condition and Robinson condition ).

Short-term changes in the real exchange rate result primarily from fluctuations in the nominal exchange rate, as the price level reacts only very slowly. For example, an increase in the nominal exchange rate with a constant domestic and foreign price level causes a real devaluation of the domestic currency and thus an improvement in international competitiveness. This adjustment takes several years and takes the form of a J-curve .

On the other hand, a currency that is appreciating in real terms is characterized by higher purchasing power compared to other countries (improved terms of trade ), but at the same time it reduces the competitiveness of the domestic economy. These changes in international competitiveness lead to lasting effects on the domestic and foreign goods and factor markets. In general, the exchange rate changes are not passed through directly by the companies on the offer price, since the exporters want to be competitive. Increasingly, invoices are issued in a generally accepted currency, so changes in the exchange rate do not affect demand, but rather the exporter's profit.

Individual evidence

  1. ↑ Baßler, Ulrich; Heinrich, Jürgen; Utecht, Burkhard: Fundamentals and problems of the national economy . 18th, revised and expanded edition. Schäffer-Poeschel Verlag, Stuttgart, 2006, p. 570
  2. ↑ Baßler, Ulrich; Heinrich, Jürgen; Utecht, Burkhard: Fundamentals and problems of the national economy . 18th, revised and expanded edition. Schäffer-Poeschel Verlag, Stuttgart, 2006, p. 570
  3. ↑ Olivier Blanchard and Gerhard Illing: Macroeconomics . 4th updated edition. Pearson Studium, Munich, 2006, p. 517
  4. ↑ Gabler's economic dictionary. 16th updated edition. Gablers, Wiesbaden, 2005, p. 3289
  5. ↑ Olivier Blanchard and Gerhard Illing: Macroeconomics . 4th updated edition. Pearson Studium, Munich, 2006, p. 520
  6. ↑ a b Dr. Manfred Willms: International Monetary Policy . 2nd, revised and expanded edition. Franz Vahlen Verlag, Munich, 1995, p. 27
  7. ↑ Josef Forster, Ulrich Klüh, Stephan Sauer: Exercises for macroeconomics . Pearson Studium, Munich, 2005, p. 344
  8. ↑ Olivier Blanchard and Gerhard Illing: Macroeconomics . 4th updated edition. Pearson Studium, Munich, 2006, p. 516
  9. ↑ Dr. Manfred Willms: International Monetary Policy . 2nd, revised and expanded edition. Franz Vahlen Verlag, Munich, 1995, p. 26

literature

Web links

Current exchange rates of the European Central Bank

This version was added to the list of articles worth reading on May 20, 2008 .