Question

If the exchange rate is 1 dolar \(=£ 0.6612\) (pounds) and the price of a U.S. good is \(\$ 764,\) what is the equivalent pound price?

Short answer

The equivalent pound price for the U.S good is approximately £505.08

Step-by-step solution

Understanding the exchange rate

The exchange rate between two currencies (in this case dollars to pounds) simply tells us how much of one currency we can get for one unit of the other. In this scenario, the rate is 1 dollar = £0.6612.

Applying the exchange rate to the price of the good

Given the price of the U.S. good is $764, the equivalent pound price is simply the product of the price of the good in dollars and the exchange rate. This can be calculated through multiplication: £0.6612 * $764.

Calculation

Multiply 764 dollars by exchange rate £0.6612 per dollar to get the pound price: £0.6612/dollar * 764 dollars = £505.08 (rounded to two decimal places). The value of dollars cancels out in the equation, yielding a result in pounds.

Key concepts

Currency Conversion

Currency conversion allows us to determine how much of one currency is needed to exchange for another. This is crucial in our global economy, where goods, services, and investments cross international borders frequently. When you hear someone mention converting currency, it simply involves using established exchange rates to switch from one currency to another.

To understand currency conversion:

• Identify the current exchange rate, which indicates how much one unit of currency can be exchanged for another.
• Multiply the amount you have in the starting currency by the exchange rate, resulting in the converted amount.

For example, if we have $764 and the exchange rate is 1 dollar = £0.6612, multiplying these gives us the value in pounds. So, $764 multiplied by £0.6612 results in approximately £505.08, illustrating how closely intertwined currency conversion is with daily economic transactions.

Foreign Exchange

The foreign exchange market (commonly referred to as Forex or FX) is where currencies are traded. It is the largest and most liquid financial market in the world, with trillions of dollars exchanged daily. Foreign exchange is instrumental in determining the value of currencies since the exchange rates fluctuate based on various factors.

Key points about the foreign exchange:

• Exchange rates can fluctuate due to economic news, geopolitical events, and market sentiment.
• Participants in this market include banks, financial institutions, corporations, investors, and even governments.

Understanding how foreign exchange works helps in grasping why currencies appreciate or depreciate, affecting everything from everyday purchases to international trade agreements.

Economics Calculation

Economics calculations involve applying mathematical methods to economic theory to make informed decisions. These calculations help determine prices, costs, and profits, enabling individuals and businesses to strategize effectively. In currency and foreign exchange, economics calculations are vital for predicting outcomes, budgeting, and planning financial transactions.

Here's how economics calculations are applied in relation to currency exchange:

• Determine the total cost of purchasing or selling currency by multiplying the base amount by the exchange rate.
• Use this to forecast future spending or returns when dealing with international currencies.

By understanding these calculations, you can better navigate the financial landscape, ensuring strategic financial decisions that align with market movements and currency fluctuations.