What does the term exchange rate refer to?

The term exchange rate specifically refers to the value of one currency expressed in terms of another. This concept is essential in international trade and finance as it determines how much of one currency can be exchanged for a unit of another currency. For instance, if the exchange rate between the US dollar and the euro is 1.2, it means that one US dollar can be exchanged for 1.2 euros.

Exchange rates can fluctuate based on various factors, including interest rates, economic stability, and market speculation, which makes them a crucial component of global economic interactions. This understanding provides the foundation for analyzing foreign exchange markets, trade balances, and investment flows between countries.