Basic concepts of macroeconomics: Exchange rate

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Annexe I: Basic concepts of macroeconomics

At the international level

  • Exchange rate

Exchange rate refers to the price of one currency in comparison to another currency. For example, let’s say that we want to exchange American dollars with Malaysian ringgit. The exchange rate between the US dollars and Malaysian ringgit is 4 MYR per dollar. In other words, 1 US dollar can buy 4 MYR. Exchange rates change depending on demand for a certain currency.

Beginning in the 19th century, the gold standard was commonly used by governments to regulate their currency. The term ‘gold standard’ refers to countries linking the value of their currency to a fixed amount of gold. After the United Nations (UN) Bretton Woods Conference in 1944,1See Annexe II of this starter kit for a more detailed history of the Bretton Woods conference and its outcomes. a new monetary system was imposed. This system tied each country’s currency to the US dollar, instead of to gold. In this new system, only the US had to keep gold reserves to back its currency. After 1971, the Bretton Woods system was abandoned and replaced with a floating exchange-rate system. This means currencies float or fluctuate against each other in the market.

Governments sometimes deliberately diminish the value of their currency. This adjustment is called ‘devaluation’. It is often used to make a country more competitive in international trade or as a condition of debt repayment. Devaluation reduces the price of exported goods and services, giving an advantage to the country in the international market.

Relatedly, devaluation increases the cost of imported goods and services. For countries that are dependent on imported goods to fulfill some of the basic needs of people, devaluation can lead to significant problems for vulnerable populations in terms of access to basic goods (such as food).

In the Global South, devaluation of currency (as a condition of debt repayment) leads to an increase in the price of medicines, which comes from the Global North. This prevents the access of those with illnesses or disabilities.2 Chouinard, V. (2018). “Living on the Global Peripheries of Law: Disability Human Rights Law in Principle and in Practice in the Global South. Laws, 7(1), 8. In this sense, exchange rates and related policies have significant impacts on people’s everyday lives, overall living standards of people, and the realisation of human rights.3Balakrishnan, R., Heintz, J., & Elson, D. (2016). Rethinking Economic Policy for Social Justice: The radical potential of human rights (1st ed., pp. 111). Routledge.


Left ArrowBasic concepts of macroeconomics: Banking system Purple Dot Economic aggregates and economic growthRight Arrow





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