The exchange rate of currency in relation to other currencies represents the price of currency being expressed in terms of another currency or otherwise the expression in a national currency of a monetary unit price of the foreing country.

For any kind of purpose the exchange of currencies with each other requires previously the deployment of determined reports betwin them,which means the establishment of exchange rates or otherwise the exchange rate of currencies.Therefore,the country's economy is assessed and reassessed continuously on the world marketthrough the exchange rate course.But in fact further the comparison of price coins with each other ,the exchange rate is not simply a relative instrument as it is guessed,but a very important tool to connect the economy of a country with the rest of the world and at the same time a tool to transmit monetary,policy and economic changes etc.

There is a certain space of the use of foreign currency exchange rates as a political tool to influence macroeconomic variables ,it is therefore important the study of exchange rates in all aspects and the treatment of each factor that influencesthe latter.

Generally,the economic theory recognizes about 8 types of exchange courses,but courses which are between 2 extrems:those totally flexible and fixed.

-Completely fixed exchange rates are those courses that do not allow the change in exchange rates of currencies.This means that when we have changes to restore the balance again intervenes the country central bank by selling or buying currencies.So,the fixed exchange course is ensured through continuous intervention of banks of different countries.

-The lambent exchange rate or otherwise known as fluctuant exchange rate is a monetary regime where theory courses fluctuate freely and without external interference but this regime requires the establishment of courses demand and supply for different currencies.the central banks do not intervene in restoring the previous balance for the new balance established by the market it self.(1)


Without doubt you should consider the costs of adaptation to one to another course but we should not consider only the primary costs even the other factors which are:

- Inflation. The flexible systems courses between currency exchange rates take into account the changes in the level of prices,so inflation.countries with high inflation rate have their currency devaluations.A high inflation rate is associated with currency devaluations because goods are more expensive by reducing the request for them.Between inflation and exchange rates there is a strong positive link.

§ Changes in the overall price level was preceded in time exchangerate changes.

§ The action in the connection between the above variables has unilateral character,in the sense that the link is weak in the case of exchange rate fall.

Expected inflation.Particulary sensitive situations affecting uncertainty. The expected inflation operates in current inflation directly as well as through exchange rates.The grouth of expected inflation exerts pressure for the currency weakening.As a result of the country expected inflation increase the exchange rate will grow.So it depends positively by an expected increase in the supply of money,depends negatively by an expected increase in our real income,and the forces expected exchange rate change in the futute.

Productivity. If a country is more productive than the other,then the prices of goods to this country will be lower than the prices of foreign goods.

As a result of domestic demand for goods increases and the currency is overdeemed. The reduction of prices in the country increases exports leading to currency evaluation.

Tastes and preferences for domestic goods compared with foreign ones. The increase of preferences for foreign goods leads to the depreciation of local currency. This is because a growing preference for foreign goods means import growth that leads to increased supply for domestic currency, so domestic currency depreciation. The increased demand for local products causes appreciation of domestic currency, while increasing the demand for foreign goods leads to belitting of local currency.

Tariffsand quotas.Theforeign trade restrictions through tariffs and quotas affect the exchange rates, because they affect on growth demand for domestic goods compared with those of foreign ones. Their setting lows the offer for the local currency leading to currency evaluation.

Financial capital.The capital out restriction redouces the money supply in foreign exchange market in exchange with foreign currency leading to strengthening of local currency. May have the capital reduction that comes within the country. In this case we will have exchange rate depreciation due to lowering demand for local currency.

Trade balance.The balance effects affect directly to request and currency offer. Dowbtless, imports and exportsof all the conditions of Albanian trade deficit makes that the demand and supply for currency be highly sensitive. The achievement of a trade balance would help to achieve better indicators. The non validity of currency in relation to foreign curencieswill depreciate the country's products leading to an increase in exports. The non validity of currency affects both sides of the trade balance leading to narrow the budget deficit from both sides.

Outside Private transfers, consist mainly of income emigrants. The increased private transfers from abroad will mean increasing the supply in foreign currency exchange market and the revaluation of the Albanian Lek. The implementation of the regime of fixed exchange rate where the value of the currency will be exchanged in a fixed value against a foreign currency, like U.S. dollar or euro, would be probably more suitable for countries in a low level of monetary policy credibility, or high level of economic openness combined with the need for a sustainable exchange rates and in that economy where the foreign currency has a huge part and it is replaced with the local currency as in the case of Croatia. The same can be said for the extreme case, the replacement of currency with one of these strong currencies.(2)


The performance of exchange rate has increased the risk resources on the expected performance level price, but however the inflationary pressure at the end of 2008 and early 2009 has been low.For this reason after a growth of interest rate in the middle of 2008, the bank of Albania has cut it in January 2009 to level 5.75%.(3)

The prices of major currencies against the national currency have reflected the situation of supply and demand for the currency.For most of countries the currency exchange rate against foreign currencies has been sustainable.(4)In the and of 2008, in nominal terms, the currency exchange rate against EURO and USD reflected an annual decline of 0.37% and 10%. However, in average annual terms Lek is appreciated by 0.66% against the euro and 7.23 % versus the American dollar exchange rate.The performance of national currency exchange rate has been strengthened.Lek is strengthened in the period from January to April by peaking in April with a tightening of 6.2% in annual terms.On the second and third months is reflected a slowdown in the pace of annual appreciation going down to 1.4% in September.In the last three months of the year the currency exchange rate is underestimated by an average of 3.2% in annual terms.(5)


Source: Bank of Albania


The financial situation of firms in industry and services has a considerable decline during the second half of 2008.As well as in the construction sector the financial situation is worsened during te second half.The individual financial situation shows a declining savings and a greater risk of deterioration of individual credit quality.A deterioration occurs even in enterprising businesses and families.This deterioration reflects the decline in demand for goods, investment declined due to smaller opportunities for funding and promotes the need for an adaptation of savings and spending pattern. If this process will be strong, there is a risk that he may encourage a forcable spiral.(6) An important source of individuals and families income are the migrants deliveries, which in 2007 were assessed of mass 12-13 % of PBB.As a result of the crisis in the developed countries of Europe, the flux of these shipments has decreased so significantly and the volatility of migrant shipments would adversely affect the value of the income of albanian families.In this way the currency flows in economic agents will become more rare, bringing a relative reduction of the country's domestic market currency.In this case, the maintenance of exchange rate levels would require a decline in demand for currency, mainly in the form of imports reduction.(7)


About the developments in the trade balance during 2008 and early 2009 is found a deepening account deficit in terms of most of the fall in exports compared with imports.The equilibrium change in currency flows created condition for increasing the preasure on the exchange rate level of the national currency, especially in the first quarter of 2009.The depreciation of the currency exchange rate of economic agents were reminded of the fact that performance of the currency exchange rate is determined freely in the market, and this is a source of danger to be understood and managed effectively.From the above analysis result that strengthening of the possible effects of international crisis in the economy of the sectors with the declining of income levels the financial system will be endangered.Another channel would be the corresponding decline in savings, which will difficult the generation of banking system resources in the form of deposits.After the demand growth period the correction consumer can bring the advantage of demand reduction for imports and trade deficit correction.(8) During the 2008 the developments in the external sector of the economy was characterized by deepening trade deficit by the decline in current transfers and increase the country's foreign exchange reserve.In general we can say that during 2008 the sensivity of financial stability to the country's external sector developments is increased.

Current account deficit

Source: Bank of Albania

At the end of 2008 the current account deficit reached 14.9% of Gross Domestic Product (PBB) by 10.4% at the end of 2007 rising to 55% the year. The decline in current net transfers is estimated around 213 million euros. The difference between imports and exports in 2008 reached 27.9% of GDP compared with 26.6% in 2007. The main factor has been the growth of goods trade with 301 million euro.It is estimated that in January 2009 imports fell by 11.6% versus their value in December 2008. Within the structure of imports the largest decrease is found in imports of capital goods as machinery, equipment etc. If the performance becomes stable for the rest of the year it could result in a contraction of manufacturing activity in the country.It looks like the business sector expects the same thing as the survey of business sector industry in the fourth quarter of 2008, marks the expected decline in exports for the first time since 2002.(9)

Indicator of current and expected export-industry

-Current export -Expected export


-The use of foreign currency exchange rates as a political tool ,influences macroeconomic variables.

-A high inflation rate is associated with currency devaluations.

-Between inflation and exchange rates there is a strong positive link.

-Exchange rate depends positively by an expected increase in the supply of money,depends negatively by an expected increase in our real income.

- The reduction of prices in the country increases exports leading to currency evaluation.

- The increased demand for local products causes appreciation of domestic currency, while increasing the demand for foreign goods leads to belitting of local currency.

- Theforeign trade restrictions lows the offer for the local currency,leading to currency evaluation.

- The increased private transfers from abroad will mean increasing the supply in foreign currency exchange market and the revaluation of the Albanian Lek

Source: Essay UK -

Not what you're looking for?


About this resource

This Economics essay was submitted to us by a student in order to help you with your studies.


No ratings yet!

Word count:

This page has approximately words.



If you use part of this page in your own work, you need to provide a citation, as follows:

Essay UK, Exchange rate of currency. Available from: <> [21-02-19].

More information:

If you are the original author of this content and no longer wish to have it published on our website then please click on the link below to request removal:

Essay and dissertation help