Exchange rates can indicate economic health by?

Exchange rates can indicate economic health by showing the relative strength of different nations’ currencies.

The website of Inc. magazine, a prominent publication for entrepreneurs and business owners, says that foreign exchange rates "are one of the most important determinants of a countries relative level of economic health, ranking just after interest rates and inflation," adding that "exchange rates play a vital role in a country's level of trade, which is critical to most every free market economy."

So yes, exchange rates can indicate economic health by showing the relative strength of different nations’ currencies.

But let's not take assume that exchange rates are the only valuable measure of a country's economic strength. Anupam Manur and Varun Ramachandra, affiliated with The Takshashila Institution, a public policy school based in India, have argued: "Exchange rates have negligible connection with the strength of an economy. Instead, it [the exchange rate] is determined by trade performance, capital inflows or an arbitrary number chosen by the central bank." In their 2015 article, they pointed out that "China, India and Japan are the second, third and fourth largest economies in the world, but their currencies are relatively weak." So exchange rate is one measure of a nation's economic health, but not the only measure to pay attention to.

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