Ever since humans abandoned barter-the exchange of the fruit of one's own labor for the fruit of another person's labor-and adopted money as the generally accepted means of exchange, the issue of fairness in representing the correct value or worth of one's work has been central. How many units of money should a farmer receive for one unit of potatoes, and how many units of colfee should the farmer receive for these units of money? In other words, what is the exchange rate of potatoes for colfee?
For transactions within one economy, the market mechanism establishes the "fair" monetary value of all human activities. When national boundaries are crossed, however, national monetary units, or currencies, lose their universal acceptability. Every country in the world has its own currency, which is by law the only currency accepted and used by its own citizens and by foreigners who visit or do business with the country in question. Thus, if international trade is to take place, there must be a way of transforming one currency into another. The process of deciding how one currency will be converted into another is known as exchange rate determination. The end result of this process is a ratio expressing the number of units of one currency in terms of the other-the exchange rate. 1
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