What is the importance of the exchange rate system for business?

There may be 3 types of exchange rate system-

1. floating rate
2. Fixed rate
3. A Composition of above two

In a free exchange rate market exchange rate decided mainly by demand and supply of currency vis-a-vis other currencies. In fixed /peg exchange rate system , central banks decide the exchange rate on daily basis. In 3rd system currency exchange rate is allowed to move in a fixed band, which is a decided by central bank. When exchange rate goes byond the upper and lower limit of this band then central bank takes action and sell/purchase currencies to keep the exchange rate within specified price band. The upper and lower limit of exchange rate band is alter from time to time keeping in mind and supply scenario and foreign trade policy objectives.

If the value of a currency goes down vis-a-vis other currencies in forign exchange market than it helps the export fro that country. Exports become cheaper in foriegn market becaues people need to spenf less in the importing country. It leads to makes exports more competitive in wolrld market . On the other hand imports become more dearer leading to increase the inflation an turning the economy into a high cost economy , iff country inputs a large part of raw material from outside, as in the case of india imports approximately 80% of its total cruide oil requirement. when Indian Rupee goes down via avis other currebcy , it means that India will have to sellout more indian Currency to imports the same quantity of cruide oil and commodities. Then we see an increase ij the general price level in the economy,which effects the economy badly. Low currency value in exchange rate makes tyhe imports costly and hence protect the local industry against large scale imports . Low currency value leads to incinerates ein export an generally decrease in imports , helping the economy in certain ways. This is why many centarl bank try to keep the exchange rate of theirs currency at low level. China is a classic example in this case.

If value of currency goes up vis-a-vis other currency than it will have a totally different impact on export and import of coynrtru.

If a country export more and import less then it will have a trade surplus /current account surplus leading to favourable demand and supply scenario of its currency in exchange rate market, pushing up the vlue of laocal currency vis-a-vis other currency. otherwise viseversa .

hence we can see that both exchange rate and terms of trade inflience each other and both of these have bearing on domestic as well as international bussiness .