The economics of currency exchange rate has also been rather elusive to me and I have never been able to fully understand how it works. Why do exchange rates fluctuate and what does it mean when one currency is weaker/stronger than another and how does that affect the currency that I am using? People often talk about losing money or getting more money when they exchange currency but what does that mean exactly? For example, looking current at the USD/GBP exchange rate. *1 GBP = 1.126 USD.* If I exchange £ to dollars, am I getting more money or losing money? Which one is stronger? Wouldn’t *1.126 USD not simply be of equivalent value to £*
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Think of currency as cars. A car can drive you from point A to point B, so any car that can do that should be the same… not exactly.
You could have a Chevrolet Sonic or a Chevrolet Corvette, but still cars, both still get from A to B, but clearly they are not the same. Currency works similarly.
The two cars have different sized engines Countries have more/less powerful economies. The power of the car is based on horsepower and torque. The power of the country is based on the goods produced there. If your country has goods that the rest of the world wants, you generally have a stronger economy, money is constantly flowing in.
Back to your exchange rate, you take your $20k Chevy Sonic and put a briefcase with $70k in the back seat and now it’s “closer” in value to the corvette. Again both are cars, both get from A to B, but one has more value.
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