What is an exchange rate and how does it affect international trade?

An exchange rate is the value of one currency relative to another, determining how much of one currency is needed to purchase another. Exchange rates fluctuate due to factors such as interest rates, inflation, and economic stability. Exchange rates directly impact international trade by influencing the cost of imports and exports. A stronger currency makes a country’s exports more expensive and imports cheaper, which can lead to a trade deficit. Conversely, a weaker currency makes exports cheaper and imports more expensive, potentially boosting exports but increasing the cost of imports.