Financial Education - Influence of globalization on the exchange rate and inflationary process

Globalization has generated an intricate network of commercial and financial links between countries; when the international economic system functions properly, it contributes to rapid economic growth; when the commercial system collapses, production and income around the world suffer.

Therefore, another variable that emerging investors must consider before, during and after the investment process within the national territory is the exchange rate also called exchange parity.

Inflation reflects the decrease in the purchasing power of the currency, a loss of the real value of the internal medium of exchange and unit of measurement of an economy. These accelerated price changes have a direct impact on investments, since investors are required to have the financial liquidity capacity to foresee possible obligations or losses in the investment process.

From a theoretical point of view, the exchange rate is the rate that marks the relationship between the value of two currencies, or in a more prosaic way, how much of a certain currency we would need to buy another one, or in other words, how much we would get for selling that one". In this way, the exchange rate measures the market value of a national currency in relation to another currency.

The exchange rate, which represents the price of a country's currency in terms of the currencies of other countries, influences a country's international trade. Countries, as part of their monetary policies, adopt various systems to regulate their exchange markets. Especially in small open economies, exchange rate management is the most important macroeconomic policy, in other words, the exchange rate is nothing more than the ratio relationship that exists between one currency and how many units of one currency are needed to obtain one unit of the other.