How is the exchange rate defined?

The exchange rate is defined as the value of a country's currency in relation to another currency. This definition highlights how much one unit of currency is worth in terms of another currency, reflecting the relative strength or weakness of the two currencies being compared. Understanding the exchange rate is crucial for various economic activities, including international trade, investment, and tourism, as it influences the affordability of imports and exports, as well as the overall economic competitiveness of a country on the global stage.

For instance, if a country has a strong currency compared to another, its goods may be more expensive for foreign buyers, affecting export levels. Conversely, a weaker currency can make a country's exports cheaper and more attractive to foreign markets. This concept is foundational in macroeconomics and international finance, as it affects monetary policy, trade balances, and economic growth.

The other options do not accurately define the exchange rate; they refer to aspects of international economics but do not center on the reciprocal valuation of different currencies.