The exchange rate is the rate at which one currency trades against another on the foreign exchange market
If the present exchange rate is £1=$1.42 this means that to go to America you would get $142 for £100. Similarly if an American came to the UK he would have to pay $142 to get £100. Although in real life, the dealer would make a profit.
Currencies are being continuously traded on the foreign exchange markets, with the prices constantly changing as dealers adjust to changes in supply and demand
Currencies will also undergo long term changes depending on the state of the comparative countries. E.G. in the 1920s the £ was worth $4.50
Exchange rate index This gives a measure of a currency against a trade weighted basket of currencies. It is expressed as an index, where the value of the index will be 100 in the base year.
The weight given to each currency depends upon the proportion of transactions done with the country. For example in the Sterling exchange rate index the highest weighting will be given to the Euro and then the dollar.
Real Exchange Rate. This is the exchange rate after being adjusted for the effects of inflation, it therefore more accurately reflects purchasing power
