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# Exchange Rate Mechanism

## Definition

The system by which the relative value of different national currencies is determined in international trade, typically expressed as the amount of one currency needed to purchase another. Exchange rates influence the relative cost of imports and exports between countries.

## Source Chapter

Book IV, Chapter 1

## Context

Smith explains how exchange rates function as an automatic mechanism that reflects and reinforces the balance of trade between nations. He shows that when the exchange rate becomes unfavorable, it effectively taxes imports and subsidizes exports, creating a self-correcting mechanism for trade imbalances.

## Economic Domain

Exchange

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