¿What is the exchange rate?

 

The exchange rate measures the amount in pesos that must be paid per unit of foreign currency. In our case the dollar is used as the base rate because it is the most frequently used currency in Colombia for transactions abroad. As with the price of any product, the exchange rate goes up or down depending on offer and demand. When the offer is greater than the demand, that is, when there is an abundance of dollars in the market and few purchasers, the exchange rate drops, and when there is less offer than demand (when there is a shortage of dollars and many purchasers), the exchange rate rises.

 

There are several types of exchange rate regimes:

 

Fixed Exchange Rate Regime 

 

In this regime, the Central Bank commits itself to maintaining a predetermined value for the exchange rate. Thus, when there is an excess demand for foreign currency, the Bank provides the market with the necessary amount of foreign currency to maintain the exchange rate at its predetermined value.

 

Flexible Exchange Rate Regime 

 

In this regime the Central Bank abstains from intervening and the exchange rate is determined entirely by the offer and demand of foreign currency in the market.

The movements of the exchange rate downwards or upwards are called:

 

Devaluation 

 

This is the name of any upward movement of the exchange rate, that is, when more pesos must be paid for every dollar negotiated.

 

Revaluation 

 

This is the name of any downward movement of the exchange rate, that is, when fewer pesos must be paid fewer for every dollar negotiated.

 

It is important to know the difference between the nominal and real exchange rates. The nominal rate is the rate at which foreign currency is bought and sold. The real exchange rate reflects the real purchasing power of the national currency against one or several foreign currencies. This rate, besides considering the nominal rate of exchange, takes into account internal inflation and inflation in countries with which Colombia trades. The real exchange rate reflects the competitiveness of Colombian goods against those of other countries.

 

This content has been translated into English for informational purposes. Upon any query regarding its interpretation or enforceability, the Spanish version shall be deemed official, and will prevail over the English version. The authors of specific texts such as working papers or articles select the language of publication; therefore, there might be cases in which the content may only be available in English.