I.

Definition

An exchange rate is the price at which two countries' currencies can be exchanged for each other.

For example: Vietnam exchange rate is the ratio of the value of Vietnamese dong to the value of
foreign currencies. Exchange rate USD/VND = 24,240, meaning 1 USD = 24,240 VND or 24,240 VND
will buy 1 USD.

II. Classify

1. Based on the object to determine the exchange rate

- The official exchange rate is the exchange rate determined by the Central Bank of that country. On
the basis of this exchange rate, commercial banks and credit institutions will set exchange rates for
spot, forward, and swap foreign currency purchases.

- Market exchange rate is the exchange rate formed based on the relationship of supply and demand
in the exchange market.

2. Based on payment term

- Spot exchange rate (SPOT) is the exchange rate quoted by a credit institution at the time of
transaction or agreed upon by both parties but must be within the schedule prescribed by the state
bank. Payment between the parties must be made within the next two business days after the date
of commitment to buy or sell.

- Forward exchange rate (FORWARDS) is the transaction rate calculated and agreed upon by credit
institutions themselves but must be within the prescribed range of current forward exchange rates of
the State Bank in Vietnam. Time of signing the contract.

3. Based on foreign exchange transfer method

- Electronic exchange rate is the exchange rate usually listed at banks, is the exchange rate for
transferring foreign exchange by electricity, and is the base exchange rate to determine other
exchange rates.

- Letter exchange rate is the exchange rate for transferring foreign exchange by letter.

→ Electronic exchange rates are often higher than letter exchange rates.

4. Based on the time of buying/selling foreign exchange

- Buying exchange rate is the exchange rate at which the bank buys foreign exchange.

- Selling exchange rate is the exchange rate of the bank selling foreign exchange.

→ The buying rate is always lower than the selling rate and the difference is the bank's foreign
exchange trading profit.

5. Based on the value of the exchange rate

Nominal exchange rate (NER)

- Is the exchange rate between two currencies, that is, it shows how much domestic currency is
needed to buy a foreign currency, or conversely how much foreign currency is needed to buy a
domestic currency. .
Example 1: If the exchange rate between the US dollar and the Japanese yen is 80 yen per dollar, you
can exchange one dollar for 80 yen on the world market for foreign currency. A Japanese person who
wants to earn dollars will have to pay 80 yen for every dollar he buys. An American who wants yen
will receive 80 yen for every dollar he pays.

Example 2: A Vietnamese student wants to buy a Macroeconomics book written by an American

author, he will need USD to pay. To know what the exchange rate is, they will have to look at the
exchange rates published by commercial banks.

- When the exchange rate increases, it means the foreign currency appreciates and the domestic
currency depreciates.

- Nominal exchange rates are used every day in transactions on the foreign exchange market, it
includes bilateral nominal exchange rates and multilateral nominal exchange rates.

+ Bilateral nominal exchange rate: The price of one currency compared to another currency without
mentioning inflation between the two countries. If NEER > 1, the currency is considered to
depreciate (lose value) against all remaining currencies, if NEER < 1, the currency is considered to
appreciate (gain value) against all remaining currencies.

+ Multilateral nominal exchange rate (NEER – Nominal effective exchange rate): In fact, NEER is an
index, not an exchange rate, which is the average index of one currency compared to another.

- Factors that determine nominal exchange rates:

There are a number of other factors that determine the nominal exchange rate such as trade
barriers, incentives, import dependence in production and relative efficiency. Suppose that a trade
quota is imposed on a country, the demand for that country's goods will decrease and the domestic
currency will depreciate.

We can write the nominal exchange rate as This equation shows that the nominal exchange rate
depends on the real exchange rate and the price level in the two countries. Given the value of the
real exchange rate, if the domestic price level P increases, the nominal exchange rate e will decrease.

It is necessary to consider changes in exchange rates over time. The exchange rate equation can be
written:

%Change in e = %Change in ∈ + %Change in P* - %Change in P

The % rate in ∈ is the change in the real exchange rate, the % change in P is the domestic inflation
rate π, and the % change in P* is the foreign inflation rate π*. Therefore the % change in the nominal
exchange rate is:

%Change in e = %Change in ∈ + (π*- π)

Percentage change in NER = Percentage change in RER + Difference in inflation rates

- Inflation and nominal exchange rates

Figure 6-13 This scatter plot shows the relationship between inflation and the nominal exchange
rate. The horizontal axis represents the average national inflation rate minus the average U.S.
inflation rate over the period 2000-2013. The vertical axis is the average percentage change in the
country's exchange rate (per US dollar) over that period. This figure shows that countries with
relatively high inflation tend to have their currencies depreciate and countries with relatively low
inflation tend to have their currencies appreciate.

Real exchange rate (RER)

- Is the ratio between the price of foreign goods and the price of domestic goods.

For example: Suppose Vietnam and the US only produce one good, shirts, in which the price of
Vietnam's shirts is 300,000 VND and the price of US shirts is 30 USD, the nominal exchange rate
between two currencies are 20,000 VND/USD. At that time, the price of an American shirt in VND will
be 600,000 and twice as expensive as the price of a Vietnamese shirt. The actual exchange rate in
this case will be equal to 2, meaning 2 Vietnamese shirts can be exchanged for 1 American shirt.
Thus, the competitiveness of Vietnamese shirts is better than that of American shirts in terms of
price.

However, in reality, the two economies will produce a lot of goods, so instead of using the price of a
good to calculate the actual exchange rate, we will have to use the price index of the two countries
to calculate the exchange rate. Calculate the actual exchange rate.

RER = (NER X PRICE OF DOMESTIC GOOD) / PRICE OF FOREIGN GOOD

The rate at which we exchange domestic and foreign goods depends on the price of goods in the
local currency and the currency exchange rate.

RER = NER X RATIO OF PRICE LEVELS

∈ = e × (P / P*)

If the real exchange rate is high, foreign goods are relatively cheap and domestic goods are relatively
expensive. If the real exchange rate is low, foreign goods are relatively expensive and domestic goods
are relatively cheap.

- What effect does the real exchange rate have on macroeconomics?

First assume a low real exchange rate. In this case, because domestic goods are relatively cheap,
domestic people will want to buy fewer imported goods: they will buy Fords instead of Toyotas, drink
Budweiser instead of Heineken, and vacation in Florida rather than Italy. For the same reason,
foreigners will want to buy more of our goods. The result of both of these actions is that our net
export demand will be high.

The opposite happens if the real exchange rate is high. Because domestic goods are more expensive
than foreign goods, domestic people will want to buy more imported goods, and foreigners will want
to buy less of our goods. Therefore, our net export demand will be low. We write the relationship
between the real exchange rate and net exports as NX = NX(E).

- The determinants of the real exchange rate are the relationship between net exports and
real value.

Figure 6-8: The real exchange rate is determined by the intersection of the vertical line representing
savings minus investment and the downward-sloping line representing net exports. At this
intersection, the amount of dollars supplied for capital flows abroad is equal to the amount of dollars
demanded for net exports of goods and services.
Additionally, the real exchange rate is a dynamic variable and its determinants may change over time
in response to changes in the global economic environment.

- How does policy affect the real exchange rate?

Model 6-9 can be used to show changes in economic policy: domestic expansionary fiscal policies,
such as increased government purchases or tax cuts, reduce national saving . Falling savings reduces
the supply of dollars for foreign currency, from S -/ to S -1. This change increases the equilibrium real
exchange rate from € to €.

- Fiscal policy abroad

Figure 6-10 shows that this policy change shifts the S – I line to the right, increasing the supply of
dollars for investment abroad. The equilibrium real exchange rate falls. That is, the dollar becomes
less valuable and domestic goods become cheaper than foreign goods.

- Changes in personal life needs

Figure 6-11 shows that increased investment demand increases the amount of domestic investment
from I1 to I2. As a result, the supply of dollars exchanged for foreign currency decreases from S-I1 to
S-I2. This decrease in supply increases the equilibrium real exchange rate from €1 to €2.

- Purchasing power parity

Figure 6-14 any small change in the real exchange rate leads to a large change in net exports. The
extreme sensitivity of net exports ensures that the equilibrium real exchange rate stays close to the
level that ensures purchasing power parity.

There are 2 important meanings:

+ Because the net export curve remains constant, changes in saving or investment do not affect the
real or nominal exchange rate.

+ Because the real exchange rate is fixed, any changes in the nominal exchange rate result from
changes in the price level.

III. Factors affecting exchange rate fluctuations

1. Balance of payments

The international balance of payments reflects the actual revenue and expenditure situation in
foreign currencies of some countries compared to other countries in mutual international relations
transactions and represents the financial position of the country in deficit or surplus. Residual.

If the balance of payments is often in deficit (expenditure > revenue), the country’s foreign exchange
reserves may decrease, the foreign currency situation will become tense, thereby creating increased
demand for foreign currency and increased foreign currency prices.

If the balance of payments is in surplus (revenue > expenditure), foreign exchange reserves may
increase, the supply of foreign currency in the market increases, and foreign currency prices tend to
decrease.

2. Inflation

Inflation is the decline in the purchasing power of a domestic currency and is measured by an
increasing general price index. To prove the relationship between exchange rates and inflation,
Gustav Cassel (1772- 1823) introduced the theory of purchasing power parity – Purchasing Power
Parity.

According to this theory, it is assumed that in a perfectly competitive economy, freight and customs
duties are assumed to be zero. Therefore, if the goods are homogeneous, consumers will buy goods
in which country the price is really low.

3. Interest rate

Most large-scale investors in the market such as corporations and multinational companies can easily
convert investments between different currencies when the exchange rates and interest rates of
these currencies change. There is a change in direction.

The important issue is the need to compare investment income from different currencies to be sure
that they can get the best investment results. Normally, investors tend to invest in currencies with
high interest rates, which is quite commonly done by borrowing currencies with low interest rates,
converting them to currencies with high interest rates, then investing. Invest in currencies with high
interest rates in many ways to enjoy the profit difference between the two currencies. This will
create a change in foreign currency supply and demand in the market, thereby affecting the
exchange rate. Therefore, investors are increasingly interested in comparing the income generated by
the interest rate difference to be greater than the increase in exchange rates during the investment
period.

However, during the investment or lending period, exchange rate fluctuations will increase or
decrease, which will affect the increase in income or loss. Investors are at risk because the increase in
exchange rate is greater than the income due to the difference. Interest rates of two currencies. In
fact, usually currencies with high interest rates tend to increase in price, because many investors will
buy currencies with high interest rates to lend out to earn more interest.

4. Some other factors

Adjustments of financial and monetary policies, economic and social events, wars, natural disasters,
fluctuations in statistical indicators of employment – unemployment – economic growth. Especially
indicators and events in the US will affect exchange rates on the world market. Specifically, the
factors are:

+ Unemployment index increased and decreased during the month

+ Retail index

+ Results of G7, EU, Asian conferences...

+ Industrial output, GDP, GNP...

In addition, when implementing the floating exchange rate mechanism, the exchange rate is very
sensitive to economic, political, social, war events, including psychological factors... Fluctuations of
factors The above mentioned factors can individually or simultaneously affect the supply or demand
of foreign currency, thereby affecting the exchange rate.

IV. Measures to adjust exchange rates

1. Rediscount interest rate policy

When exchange rates fluctuate, the Central Bank, with the role of macro management, adjusts the
rediscount interest rate, which will change credit interest rates in the market. This has a stimulating
effect on the movement of short-term foreign currency capital flows from one country to another,
thereby leading to changes in foreign exchange supply and demand, causing exchange rates to
stabilize. Specifically:

- When the exchange rate increases, the Central Bank raises the rediscount interest rate,
leading to an increase in deposit interest rates. Attracting short-term capital into the country,
increasing the supply of foreign currency and reducing the stress of a situation where supply
is smaller than demand in the market.

2. Exchange policy

The basic principle of this measure is that the Central Bank, through the implementation of foreign
exchange buying and selling operations, creates the ability to directly change the supply and demand
relationship of foreign exchange in the market to adjust exchange rates. As follows:

- When the exchange rate increases, the Central Bank will release foreign exchange for sale, the
supply of foreign exchange in the market increases and reduces the tension on foreign exchange
supply and demand in the market (demand is greater than supply), leading to exchange rate
fluctuations. Gradually decrease.

- When the exchange rate decreases, the Central Bank buys foreign exchange, which will increase the
demand for foreign exchange in the market and reduce the tension between supply and demand in
the market (supply is greater than demand), leading to an increase in the exchange rate. Slowly
increase.

However, this measure only has a temporary effect, with the condition that the Central Bank must
have a large amount of foreign exchange reserves. In case the international balance of payments is
lacking, the Central Bank selling foreign exchange can only increase the loss of foreign exchange
reserves. For some countries that have established exchange stabilization funds, they can be used to
adjust exchange rates.

3. Currency devaluation

In case the international balance of payments is in deficit, or due to the country’s foreign trade policy
requirements, the Government can implement a currency devaluation policy. Currency devaluation
will cause the exchange rate to increase, thereby encouraging exports or limiting imports, requiring
the State to find all measures to develop the economy and control inflation.

4. Currency appreciation

The state officially raises the price of domestic currency, so foreign currency prices tend to decrease.
The increase in currency prices comes from the pressure of some other countries in international
trade competition in order to, or due to practical requirements. Current monetary policy.

V. Real-life example of exchange rate between Vietnam and the US

Example of exchange rate between VND - USD

For example, if one day 1 VND = 1 USD, what would happen?

Now you can go to Mobile World to buy the most expensive iPhone worth 1,000 USD, now you only
have to pay for it with 1,000 VND. Next you can go to Mec's showroom to buy a MayBach for 700,000
USD, before it was about 15 billion but now you only need to pay 700,000 VND which is cheaper than
a bicycle wheel. Besides, if before you had to pay about 23,000 VND for 1 liter of gasoline, now it
only costs you exactly 1 VND/1 Liter of gasoline, then you can buy 1,000 Liters of gasoline to go
anywhere you want. Once you're bored at home, you can go abroad to travel. Before, you had to
spend tens or hundreds of millions, but now you only need a breakfast of about 25,000 VND to be
able to travel across the world, because it's equivalent to with the previous amount of about 500
million VND. This is the dream life because we can go anywhere, do whatever we want because it's
so cheap.

- So why doesn't the government adjust 1 VND = 1 USD?

To understand why, let's think about the next scenario of the above wonderful things. The state will
run out of foreign currency reserves, because as you know before, when you buy an iPhone for 1,000
USD, you will have to pay 23 million VND because domestically we will buy and sell in foreign
currency. Vietnamese currency, then the store will convert this 23 million VND into USD to pay the
American party because they do not use Vietnamese currency, if you want to buy an American
iPhone, you must pay USD to the US. Therefore, no matter how the Vietnamese currency changes,
when making payments to our country, we still have to pay in USD. Therefore, when 1 VND = 1 USD,
millions of people will buy a lot of imported goods from the US and other countries because it is so
cheap. Many buyers will lead to increased demand for USD exchange and the state's USD reserves
will quickly be depleted.

- When the state's USD source is exhausted, what will happen?

We will no longer be able to import goods from abroad because we no longer have USD to pay them.
At this time, not only an iPhone, a Mercedes or a screw, but even the essential products in life are
missing. We will have no gasoline or oil because we have no more dollars to buy from foreign
countries, no machinery or raw materials for production, and we won't even be able to surf the web
on Facebook or Tik Tok because we don't have money to pay for Internet and servers. for foreign
countries. In short, we will live in a self-sufficient and self-sufficient way like North Korea and even
more so. Furthermore, we will still lose a lot of jobs because foreign companies will withdraw from
Vietnam. Previously, companies came to us because Vietnam has an abundant number of workers
and very cheap prices. But now no one can afford to pay salaries because each month they will have
to pay several million VND, which is several million USD, for each worker. Even the US president does
not receive this salary, then there will not be many jobs left for us. For example, if Samsung alone
withdraws from Vietnam, it will cause hundreds of thousands of people to starve to death, millions
of people will be affected, we will face an economic crisis because many people will be unemployed,
which will lead to The amount of products produced is less => the economy develops more slowly.
Not to mention, losing a job means starving to death because there is no money to buy food or water
=> Vietnam could return to the famine of 1945.

In short :

Although the above is just a "wonderful" scenario when the government suddenly adjusts the
exchange rate to 1 VND = 1 USD, even though this will never happen. But it is normal for the state to
adjust the exchange rate to increase or decrease, and if the adjustment is increased, meaning the
value of Vietnamese currency increases compared to USD, the story will be similar => Which country
has an economy? The more you export, the more money you lose when the price increases.
Therefore, Vietnam is an export surplus country that sells more goods abroad than it imports goods,
so when money increases in value, it will be worse, and if it loses value, it will be beneficial.

VI. Examples and effects of exchange rates with Vietnam

Vietnam's currency is the 3rd lowest in the world, only behind Venezuela and Iran. There are 2
good and bad sides for Vietnam:

- Great advantages in terms of competitiveness in exporting goods and labor resources:

+ Regarding labor: No country dares to compare with Vietnam. Due to the difference in prices,
Vietnamese people are paid quite well compared to daily life but extremely low compared to the rest
of the world. Thanks to that, Vietnamese people are willing to export labor to developed countries
because even though the salary is low compared to the average level of their country, when
converted into Vietnamese currency, it is extremely high. For example: The average salary of a
Japanese person is about 470,000 Yen = 47 Man, a low-wage job is about 34 Man. While Vietnamese
people go there, they only get about 17 Man, just a little more than 1/3 of the average salary of
Japanese people, but when exchanged and sent back to Vietnam, it costs up to about 35 million VND.
In Vietnam, the average salary is only about 7-8 million VND, equivalent to about 330 USD compared
to other countries, which is too cheap. Therefore, a series of foreign companies bring technology to
Vietnam to build factories and hire workers in Vietnam to do the same job, but if they hire workers in
their country, they have to pay a lot more. Besides, there are some manual labor jobs that are heavy
and somewhat harmful that people in their country often don't like to do or if they do, they have to
be paid high salaries, but when it comes to men's jobs, everything becomes simple. Because Vietnam
is a country with abundant labor resources and currently has no jobs, knowledge workers are also
few, so they are suitable for manual work and simple labor jobs.

+ Regarding exports: Due to exchange rate differences, most Vietnamese goods become much
cheaper than in the world. For example, 1 gold tael in Vietnam can buy 40 chickens, in Germany it
can only buy 20 chickens, in Thailand it can buy 30 chickens => (assuming the quality is the same),
then we will definitely choose to buy chickens from Vietnam .

_So is it a loss for Vietnam to sell so cheaply?

The answer is no because the cost of living of countries is relatively equal in terms of currency
(except for countries suffering from economic crisis and hyperinflation). Thus, Vietnam only needs to
produce goods that meet quality standards of food hygiene and safety to be able to compete with
other countries. Countries around the world find it difficult to compete with Vietnam and exports are
a very important part of the economy.

- Disadvantages of Vietnam when the exchange rate is low:

Hiring foreign workers:

In contrast to labor export, when hiring foreign workers, their salary converted into Vietnamese
currency will be a huge number. For example, an American engineer earns 5,000 USD/month. If we
hire a Vietnamese engineer, we will only pay about 10 million VND/month, but when we hire an
American engineer, we have to pay about 115 million VND/month. Even though American engineers
are more skilled than they are hired, the salary is still too high compared to Vietnamese money.

Import :
For example, when Iphone launches a new product that costs about 1,000 USD, Americans lose 1
week of work because their salary is about 5,000 USD/month, Japanese people about 2 weeks, Thai
people about 1 month and 15 days. But it takes Vietnamese people about 4 months => The
difference in exchange rates causes Vietnamese people to have to exchange an extremely large
number of work days to be able to buy an Iphone while Americans only have a chance to go to the
theater. Karaoke . In addition to the above example, there are many other products that are similarly
affected.