How is the currency exchange rate of countries decided?

I am doing a project on currencies, i need to know how the exchange rate of different currencies is determined. for example, INR to US$ is approx Rs.45. So how is this determined. Please dont give a 1 line answer, give the complete process or the link to the source.How is the currency exchange rate of countries decided??╬★╬★╬★╬★╬★╬★╬★╬★╬★╬★╬★╬★╬★╬★╬★╬?



Exchange Rate is of two types:-



1. Nominal Effective Exchange Rate: It is that type of ER* which does not account for changes in the price level while measuring average strength of one currency in relation to others.It is defined as under-

NEER*= Σn (Ri index) (Wi)

where i=1



Here,

*NEER= Nominal Effective Exchange Rate



Σ: Sum total of all values

i= ith trading partner ( say for India)

Ri= Exchange rate with the ith partner.It refers to Rs: ￡ for India-UK and Rs: $ for India-USA.



Ri index: Index of exchange rate with ith partner with reference to exchange rate in the base year.

Wi: Ratio of trade volume with ith trading partner to India's total trade.

n: Number of trading partners.



Estimation of Wi-

Wi= Xi+Mi upon Xi+Mi



2. Real Effective Exchange Rate(REER): It is that type of ER which accounts for changes in the price level across different countries of the world.

It is based on Constant Prices or Real Exchange rate and is estimated as under:



REER = Σn (RERi index)(Wi)



ER* Exchange Rate



?╬★╬★╬★╬★╬★╬★╬★╬★╬★╬★╬★╬★╬★╬★╬★╬?How is the currency exchange rate of countries decided?It is purely based on peoples assessment of a currency's worth. There is a lot of gobbledygook associated with it, but basically it's people's and organisation's opinions.

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