Final answer:
Countries must consider exchange rates when trading with one another because exchange rates determine the value of currencies, the cost of imports, and the competitiveness of exports.
Step-by-step explanation:
When trading with one another, countries must consider exchange rates for several reasons:
- Exchange rates require trading partners to use currencies that have roughly the same value. This is important because if one country's currency is much stronger than another's, it can make imports from that country more expensive and exports to that country cheaper, which can lead to imbalances in trade.
- Exchange rates determine how much currency will be needed to import a certain amount of goods. For example, if the exchange rate between two countries is 2:1, it means that one unit of currency from one country can be exchanged for two units of currency from the other country. So, to import a certain amount of goods worth 100 units of currency from the other country, the first country would need to exchange 200 units of its currency.
- Exchange rates establish the relative prices of different currencies, which can impact the competitiveness of a country's exports. If a country's currency becomes weaker relative to other currencies, its exports will become cheaper for foreign buyers, potentially increasing demand for those exports.