What is the difference between exchange rates and currency?

In contrast to currencies that only focus on the currency of one country, the exchange rate is a reference for the purchasing power of a country’s currency against other countries’ currencies.

Currency exchange rates are often also referred to as exchange rates. When we are dealing with citizens of other countries who do not use rupiah, of course we need to find a middle way to determine the appropriate exchange rate.

With standard currency exchange rates, transactions between countries become smoother and more controlled, because exchange rate movements are monitored by the central bank. For this reason, you may often hear the dollar to rupiah exchange rate which gives a ratio of 1 dollar to be exchanged for the amount of rupiah.

The currency exchange rate is a consideration for many parties, especially players in the import-export industry and the foreign exchange market. Industry players also need to calculate currency exchange rates when selling or buying goods from other countries, while forex market players take advantage of differences in currency exchange rates to make money.

The benefit of knowing the factors that affect currency values

Types of currency exchange rates

Because it involves the interests of various parties, the regulation of currency exchange rates becomes very complex. Therefore, there are two exchange rates that are known to the public, namely the nominal exchange rate and the real exchange rate. Then what is the difference between the two? Let’s discuss them one by one!

Nominal exchange rate

In English, the nominal rate is referred to as the nominal rate. This exchange rate is used when we do between currencies. For example, when you are traveling to the United States and need 100 US dollars, it turns out that you have to prepare 1,500,000 rupees. This means that the nominal exchange rate for one dollar is Rs 15,000.

Real exchange rate

Unlike the nominal exchange rate which directly compares two currencies, the real exchange rate is used when you want to exchange goods or services between countries. The real exchange rate, or in English terminology it is called the real exchange rate, serves as a comparison.

Just an example:

You want to buy souvenirs in Japan for 100 yen, while in Indonesia the price is 13,000. To get the correct real exchange rate, convert the rate into common currency, because 1 Japanese yen is equal to 130 rupees, and the item costs 130,000 as a souvenir. So when we compare the price of bags in America and Indonesia, we can conclude that the price of bags in Indonesia is half the price of bags in America.

The term that appears most often in discussions of currency exchange rates

When reading the news about currency exchange rates, you may come across the terms “estimation” and “depreciation”.

What does that mean? Consider the following illustration:

Appreciation occurs when people demand and need currency more, so its value increases. For example, to earn 1 dollar you need 13,500 rupees. Whereas on the previous day only Rp. 13,000 was needed. Therefore, the rise of the currency is interpreted as strength.

Conversely, depreciation occurs when the exchange rate of a currency falls and it becomes less desirable. For example, the day before we needed 13,500 rupees to exchange 1 US dollar, today the value of 1 dollar is only 13,000 rupees (a decrease of 500 rupees). Depreciation is also known as currency weakness.

Appreciation and depreciation are natural cycles that currencies go through. There are those who benefit from the dynamics of currency values. For exporters, the appreciation of the US dollar will be beneficial as they will earn more rupees.

Meanwhile, importers will prefer when the US dollar exchange rate falls to rupees, because they need fewer rupees when shopping for goods from abroad.