What is Exchange Rate : Explained with Animation

Summary

The video uses the metaphor of purchasing chocolates from different stores to explain the concept of exchange rates. In the scenario, each store has its own rules regarding the minimum amount and acceptable denominations of money. A money exchanger is introduced as a solution for customers unable to meet the store's demands. The story highlights how increased demand for a product can raise the value of a currency, just as it raises the cost of obtaining the required $100 note. The video concludes by comparing this scenario to the global economy, where exchange rates fluctuate based on demand for a country's products.

Takeaways

• 😀 The market scenario involves three stores, each with different rules for purchasing chocolates.
• 😀 Store 1 accepts only $10 bills, and the minimum chocolate cost is $10, which makes it possible to buy chocolate with $10 notes.
• 😀 Store 2 requires a $50 payment, but you can pay with $10 notes, giving 5 $10 notes to purchase the chocolate.
• 😀 Store 3 demands a $100 note for chocolate, but $10 bills are not accepted, making it impossible to buy directly with $10 notes.
• 😀 A money exchanger near Store 3 offers to exchange $10 notes for $100 notes, enabling you to buy chocolate from Store 3.
• 😀 The exchanger charges an additional fee for exchanging $10 notes into $100 notes, which raises the overall cost.
• 😀 Even though the chocolate's base cost remains the same, the additional cost comes from the fee for obtaining the $100 note.
• 😀 The increased cost of the $100 note is due to higher demand from people seeking to buy chocolate from Store 3.
• 😀 This concept demonstrates how the value of currency can fluctuate based on demand, just like how $100 notes become more expensive due to demand.
• 😀 The script then transitions to explaining how exchange rates work between countries like India and the USA, using the same analogy of demand-driven value changes.
• 😀 When demand for a country's products increases, the value of its currency rises, leading to higher exchange rates for other currencies like the Indian rupee when buying U.S. dollars.

Q & A

What is the analogy used in the script to explain exchange rates?

The script uses the analogy of purchasing chocolates from three different stores to explain exchange rates. The cost of chocolates and the currency exchanges represent how the value of money changes based on demand.

How do the rules of Store 1 affect the purchase of chocolates?

In Store 1, the minimum cost of a chocolate is $10, and only $10 notes are accepted. Since you have $10 notes, you can easily buy a chocolate.

Why can't you buy chocolates from Store 3 initially?

Store 3 requires a $100 note for the chocolate purchase, and since you only have $10 notes, you cannot buy the chocolate directly from Store 3.

What role does the money exchange counter play in this analogy?

The money exchange counter allows you to exchange $10 notes for a $100 note, which enables you to buy chocolates from Store 3, even though the store doesn't accept $10 notes.

What is the extra cost involved in buying chocolate from Store 3?

The extra cost comes from the money exchange counter, which charges a fee for exchanging $10 notes into a $100 note. This increases the overall cost of purchasing the chocolate, despite the chocolate's price remaining the same.

How does this analogy relate to real-world economics?

The analogy explains how exchange rates work. Just like the cost of exchanging $10 notes for a $100 note increases due to demand, in the real world, the value of a country's currency rises or falls depending on the demand for its products.

What happens when the demand for products from a country increases?

When demand for a country's products increases, the value of the country's currency also increases. This means it takes more of another currency to buy a unit of the stronger currency.

How does the concept of exchange rates work between two countries like India and the USA?

If demand for products from the USA increases, the value of the US dollar rises. This results in the need for more Indian Rupees (INR) to exchange for USD, which is how exchange rates fluctuate.

What is the relationship between the cost of chocolates and currency exchange in the analogy?

The cost of the chocolate remains constant, but the cost of the $100 note changes based on the demand for chocolates. Similarly, in currency exchange, the value of a currency can change depending on demand, even if the prices of goods stay the same.

Why do you need to exchange $10 notes for $100 notes in the analogy?

You need to exchange $10 notes for $100 notes because Store 3 only accepts $100 notes. Without the exchange, you cannot buy chocolates from that store.