Foreign currencies are not usually exchanged on a one-for-one basis. The rate at which one currency trades for another is what we commonly call an exchange rate. An exchange rate between two currencies can be stated in either currency, For example, the exchange rate between the U. S. dollar and the Euro is  0.6723 dollar per euro or 1.4874 euro per dollar. Note that these are not two different rates, only two ways of expressing the same rate. Exchange rates also reflect relative prices. Let us say that you are visiting in Spain and you see a bottle of wine you like selling for 8 euros. If you can buy the same wine in the United States for 15 dollars per bottle, would it be cheaper to buy it in Spain or wait until you get home? Using the exchange present exchange rate you can save money by buying the wine in France.

In the International monetary system, exchange rates are not fixed, and when they change, they make products in one country more or less expensive. For example, if the value of the euro falls relative to the U. S. dollar, it will even less expensive to buy the Spanish wine in Spain instead of in the United States. Changes in the relative value of currencies are referred to as currency appreciation when the exchange rate rises and currency depreciation when exchange rate decreases. This explains the fluctuating prices of imported goods. When the dollar appreciates, foreign goods become less expensive to the residents of the United States. However, the downside of this dollar appreciation is that it decreases exports and increases imports, thus residents will buy fewer U.S. made goods.