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An exchange rate is the price of a nation’s currency in terms of another currency. Exchange rates are quoted in values against the US dollar. However, exchange rates can also be quoted against another nations currency, which are known as a cross currency.There are two types of exchange rates, floating in where the currency rate is decided by market forces or pegged where the government controls the rates. The Indonesian Rupiah (IDR) is an example of a pegged currency, where the government allows Rupiah to bebetween the values of Rp13, 000-13,400.?An exchange rate can depreciate; this is when the value of a currency falls in terms of a foreign currency. Depreciation can be a good thing when a country is trying to correct a balance of payment deficit or when trying to create employment, this is due to the increase in demand for home-produced goods as foreigners find it cheaper, and imports become more expensive for locals, causing them to switch to purchasing local goods instead. However this can damage the country if their manufacturing sector depended on imports as raw materials as it will cause an imported inflation.Exchange rates could also appreciate; in contrary to depreciation this is when a nation’s currency increases in value in terms of a foreign currency. An appreciation will lower aggregate demand as exports will be less competitive due to its higher price and the quantity of imports will rise as citizens find it cheap. This will cause deterioration in a nation’s Balance of Payments but slow down inflation. The balance of trade (BOT) is the difference between a country’s imports and its exports for a given time period. The balance of trade is the largest component of the country’s balance of payments (BOP). In this research document BOT data will be used to analyze the effects of exchange rates on Indonesia’s manufacturing industry.

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