Foreign Exchange (FOREX)

• The buying and selling of currency
• Ex: in order to purchase souvenirs in France, it is first necessary for Americans to sell their Dollars and buy Euros. 
• Any transaction that occurs in the Balance of Payments necessitates foreign exchange 
• The exchange rate (e) is determined in the foreign currency markets 
• Ex: the current exchange rate is approximately 8 Yuan to 1 dollar
• Simply put, the exchange rate is the price of a currency 

Changes in Exchange Rates

• Exchange rates are a function of the supply and demand for currency. 
• An increase in the supply of a currency will decrease the exchange rate of a currency 
• A decrease in supply of a currency will increase the exchange rate of a currency 
• An increase in demand for a currency will increase the exchange rate of currency
• A decrease in demand for a currency will decrease the exchange rate of a currency 

Appreciation and Depreciation

• Appreciation of a currency occurs when the exchange rate of that currency increases 
• Depreciation of a currency occurs when the exchange rate of that currency decreases 
• Ex: If German tourists flock to America to go shopping, then the supply of euros will increase and the demand for Dollars will increase. This will cause the Euro to depreciate and the dollar to appreciate. '

To understand Appreciation and Depreciation more, please visit this website: Appreciation and Depreciation

Exchange Rate Determinants

• Consumer Tastes
• Relative Income 
• Relative Price Level
• Speculation