Exchange Rate

Before a trip abroad, stop by a currency exchange counter in Korea and you'll see numbers blinking nonstop on the board next to the U.S. dollar and other currencies. Just as an apple at the grocery store has a price tag of 1,000 won, the foreign currency called the dollar has a price tag of 1,300 won.

An exchange rate is the ratio used to swap one country's money for another's. It's also the "price" of foreign money. If you have to pay 1,300 won to get 1 U.S. dollar, then the won-dollar exchange rate is 1,300 won.

Just as the price of goods at a market is set by deals between buyers and sellers, the exchange rate is set in the foreign exchange market in Korea, which uses a floating exchange rate system. When more dollars leave Korea than come in, dollars get scarce and the price of foreign money, the exchange rate, goes up. When dollars become plentiful, the rate goes down.

When the exchange rate rises from 1,000 won to 1,400 won, we call it a "rise in the exchange rate." We also call it a "weaker won." To buy the same $1 item, you used to pay only 1,000 won, but now you must hand over 1,400 won. Your own money has lost that much buying power.

When the rate goes up, a pair of shoes ordered from an overseas shopping site jumps in price. Sending living expenses to a student studying abroad gets more costly too. On top of that, imported raw materials like oil and wheat flour get pricier, so grocery prices and even transportation costs at home can rise one after another.

But some people are smiling. An exporter that sells cars or smartphones abroad earns $1 overseas and now takes home 1,400 won instead of 1,000 won. That gives the company room to cut prices, so it gains a price advantage in overseas markets.

A rising rate isn't always bad, and a falling rate isn't always good. Ups and downs in the exchange rate create gains and losses that point in opposite directions, depending on who you are in the economy.

For example, when the rate falls (a stronger won), imported beef and home appliances get cheaper, and consumers feel more breathing room. But an exporter selling the same goods abroad gets fewer won when it converts its dollar earnings, and its sales can take a hit.

To be more precise, an exchange rate is more than a price tag. It's a mirror that shows a country's economic strength and the flow of the world economy. If the rate swings too sharply in one direction, both companies and households have a hard time planning ahead. That's why a stable balance is the best situation.