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An exchange rate specifies the value of one country's currency in terms of another. It is defined as the number of units of a domestic currency required to purchase one unit of a foreign currency. For instance, an increase in the exchange rate (e.g., more domestic currency units per foreign unit) signifies a depreciation of the domestic currency.

Definition of Exchange Rate

Suppose the exchange rate between the Canadian Dollar (CAD) and the US Dollar (USD) changes from 1.30 CAD per USD to 1.35 CAD per USD. Based on this change, which of the following statements is correct?

An American company imports electronic components from Japan. Last year, a component cost 1,500 Japanese Yen (JPY), which was equivalent to 10 U.S. Dollars (USD). This year, the same component still costs 1,500 JPY, but the American company now has to pay 12 USD for it. Based on this information, has the U.S. Dollar appreciated or depreciated against the Japanese Yen? Explain your reasoning by referencing the change in the number of currency units required for the transaction.

Interpreting Exchange Rate Changes

If the exchange rate is 1.15 euros per British pound, a product that costs £200 in London is less expensive than a product that costs €225 in Paris.

A U.S. tourist is planning a trip to Japan. They observe that the exchange rate has changed from 110 Japanese Yen (JPY) per U.S. Dollar (USD) to 100 JPY per USD. From the perspective of the U.S. tourist, is this change favorable or unfavorable? Explain your reasoning by describing how the purchasing power of their dollars in Japan has been affected.

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