What are exchange rates?

Exchange rates are like a special kind of price tag that tells you how much one currency is worth compared to another.

Imagine you have a lemonade stand in your neighborhood, and you want to sell lemonade to kids who come from across the street. You know how many cups of lemonade it takes to buy a candy bar at the corner store. But if you want to sell lemonade to kids from all the way across town, you might need to figure out what kind of trade works best for both sides.

Let’s say you have 5 toy cars and your friend has 10 stickers. You decide that 1 toy car is worth 2 stickers. That’s like an exchange rate, it tells you how many stickers you get for each toy car.

Now imagine instead of toy cars and stickers, people are trading money. If you live in a country where they use dollars, and your friend lives in a country that uses euros, the exchange rate is like saying "how many euros does it take to buy 1 dollar?" That way, when you want to send money or buy something from another country, you know exactly how much you need.