Exchange rate policies play a big role in how countries trade with each other. They can change the prices of what we buy from other countries (imports) and what we sell to them (exports). Let’s break that down:

1. Currency Value:

   • When a country’s money (like the US dollar) is strong, it means that things they sell to other countries become more expensive.
   • On the flip side, it makes things they buy from other countries cheaper.
   • For example, if the dollar goes up by 1%, the amount of stuff America sells to other countries might drop by around 0.7%. (According to the U.S. Department of Commerce)

2. Trade Balance:

   • Countries can choose between fixed exchange rates (stable prices) and floating exchange rates (changing prices).
   • Having a stable money value helps them sell more than they buy, which is called a trade surplus.
   • A good example is Germany. In 2020, they had a trade surplus of $226 billion!

3. Inflation and Competitiveness:

   • When prices go up a lot (this is called inflation), it makes the currency worth less.
   • Countries that keep inflation low often have better deals when trading with others.

In summary, how countries manage their money values affects everything from prices to trade success.