Foreign exchange rates
Cambridge IGCSE Economics (0455) · Unit 6: International trade and globalisation · 9 flashcards
Foreign exchange rates is topic 6.4 in the Cambridge IGCSE Economics (0455) syllabus , positioned in Unit 6 — International trade and globalisation , alongside International specialisation, Globalisation and multinational companies and Free trade and protection. In one line: The exchange rate is the price of one currency expressed in terms of another currency.
This topic is examined in Paper 1 (multiple-choice) and Paper 2 (structured questions, including data-response items).
The deck below contains 9 flashcards — 7 definitions, 1 key concept and 1 application card — covering the precise wording mark schemes reward. Use the 7 definition cards to lock down command-word answers (define, state), then move on to the concept and application cards to handle explain, describe and compare questions.
The term 'exchange rate'
The exchange rate is the price of one currency expressed in terms of another currency.
Questions this Foreign exchange rates deck will help you answer
- › Explain the function of the 'foreign exchange market'.
- › A country's currency depreciates. Analyze two likely impacts on its balance of trade.
Define the term 'exchange rate'.
The exchange rate is the price of one currency expressed in terms of another currency.
Explain what is meant by a 'floating exchange rate'.
A floating exchange rate is a system where the value of a currency is determined by the forces of supply and demand in the foreign exchange market, with no government intervention. Fluctuations occur freely based on market dynamics, such as changes in interest rates or investor confidence.
What is a 'fixed exchange rate' system?
A fixed exchange rate is a system where a country's currency value is pegged to another currency or a basket of currencies at a specific rate. The government or central bank actively intervenes in the foreign exchange market to maintain this fixed rate.
Define 'appreciation' in the context of foreign exchange rates.
Appreciation occurs when the value of a currency increases relative to another currency in a floating exchange rate system. This means it takes less of that currency to buy the same amount of the other currency, making exports more expensive and imports cheaper.
Explain what is meant by 'depreciation' of a currency.
Depreciation is a decrease in the value of a currency relative to another currency in a floating exchange rate system. This means it takes more of that currency to buy the same amount of the other currency, making exports cheaper and imports more expensive.
What is 'devaluation' in the context of exchange rates?
Devaluation is a deliberate downward adjustment of a currency's value by a government in a fixed exchange rate system. A government might devalue its currency to improve its trade balance or boost economic growth.
Define the term 'revaluation' in the context of foreign exchange rates.
Revaluation is a deliberate increase in the value of a currency by a government in a fixed exchange rate system. It makes exports more expensive and imports cheaper and is usually undertaken to combat inflation.
Explain the function of the 'foreign exchange market'.
The foreign exchange market (forex) is a global decentralized marketplace where currencies are traded. Its primary function is to facilitate the exchange of currencies for international trade, investment, and speculation.
A country's currency depreciates. Analyze two likely impacts on its balance of trade.
A currency depreciation will likely lead to an increase in exports as they become cheaper for foreign buyers. Simultaneously, imports become more expensive, which should lead to a decrease in import volume, improving the balance of trade, all else being equal.
Key Questions: Foreign exchange rates
Define the term 'exchange rate'.
The exchange rate is the price of one currency expressed in terms of another currency.
Explain what is meant by a 'floating exchange rate'.
A floating exchange rate is a system where the value of a currency is determined by the forces of supply and demand in the foreign exchange market, with no government intervention. Fluctuations occur freely based on market dynamics, such as changes in interest rates or investor confidence.
What is a 'fixed exchange rate' system?
A fixed exchange rate is a system where a country's currency value is pegged to another currency or a basket of currencies at a specific rate. The government or central bank actively intervenes in the foreign exchange market to maintain this fixed rate.
Define 'appreciation' in the context of foreign exchange rates.
Appreciation occurs when the value of a currency increases relative to another currency in a floating exchange rate system. This means it takes less of that currency to buy the same amount of the other currency, making exports more expensive and imports cheaper.
Explain what is meant by 'depreciation' of a currency.
Depreciation is a decrease in the value of a currency relative to another currency in a floating exchange rate system. This means it takes more of that currency to buy the same amount of the other currency, making exports cheaper and imports more expensive.
More topics in Unit 6 — International trade and globalisation
Foreign exchange rates sits alongside these Economics decks in the same syllabus unit. Each uses the same spaced-repetition system, so progress in one informs the next.
Cambridge syllabus keywords to use in your answers
These are the official Cambridge 0455 terms tagged to this section. Mark schemes credit responses that use the exact term — weave them into your answers verbatim rather than paraphrasing.
Key terms covered in this Foreign exchange rates deck
Every term below is defined in the flashcards above. Use the list as a quick recall test before your exam — if you can't define one of these in your own words, flip back to that card.
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