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    Falling Exchange Rate Essay

    Uploaded by

    Leyla Gasimova
    This document discusses the advantages and disadvantages of a falling exchange rate for an economy. A falling exchange rate, or depreciation, means a country's currency is worth less compared to other currencies. It can increase exports and economic growth by making the country's exports cheaper abroad, but it also makes imports more expensive and can cause inflation. The document explores these impacts in more detail using relevant diagrams and examples, weighing both the positive and negative effects of a depreciating exchange rate.

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    Falling Exchange Rate Essay

    Uploaded by

    Leyla Gasimova
    61 views3 pages
    This document discusses the advantages and disadvantages of a falling exchange rate for an economy. A falling exchange rate, or depreciation, means a country's currency is worth less compared to other currencies. It can increase exports and economic growth by making the country's exports cheaper abroad, but it also makes imports more expensive and can cause inflation. The document explores these impacts in more detail using relevant diagrams and examples, weighing both the positive and negative effects of a depreciating exchange rate.

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    This document discusses the advantages and disadvantages of a falling exchange rate for an economy. A falling exchange rate, or depreciation, means a country's currency is worth less compared to other currencies. It can increase exports and economic growth by making the country's exports cheaper abroad, but it also makes imports more expensive and can cause inflation. The document explores these impacts in more detail using relevant diagrams and examples, weighing both the positive and negative effects of a depreciating exchange rate.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    61 views3 pages

    Falling Exchange Rate Essay

    Uploaded by

    Leyla Gasimova
    This document discusses the advantages and disadvantages of a falling exchange rate for an economy. A falling exchange rate, or depreciation, means a country's currency is worth less compared to other currencies. It can increase exports and economic growth by making the country's exports cheaper abroad, but it also makes imports more expensive and can cause inflation. The document explores these impacts in more detail using relevant diagrams and examples, weighing both the positive and negative effects of a depreciating exchange rate.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 3

    To what extent do the advantages of falling exchange rates for an economy

    outweigh the disadvantages? You are encouraged to support your answer


    with the use of relevant diagrams.

    An exchange rate is the price of a nation’s currency in terms of another currency.


    Thus, an exchange rate has two components, the domestic currency, and a
    foreign currency, and can be either directly or indirectly. In a direct, the price of a
    unit of foreign currency is expressed in terms of the domestic currency. In an
    indirect, the price of a unit of domestic currency is expressed in terms of the
    foreign currency. Exchange rates are mentioned in values against the US dollar.
    However, exchange rates can also be mentioned against another nation's
    currency, which is known as a cross currency, or cross rate.

    A fall in the exchange rate is known as depreciation in the exchange rate. It


    means the currency is worth less compared to other countries. A fall in exchange
    rate, tends to increase the rate of economic growth and reduce unemployment.
    Moreover, tends to benefit exporters, but makes imports more expensive. Also, it
    tends to cause inflation that is because imports are more expensive, highest
    domestic demand and firms have fewer incentives to cut costs. Finally, it tends to
    improve the current account deficit.

    When there is depreciation, and the exchange rate goes down, exports will be
    cheaper and imports will become more expensive. For example, a
    depreciation of the dollar makes US exports more competitive but raises the
    cost of importing goods into the US. Therefore there will be an increase in
    exports and decrease in the quantity of imports. Domestic firms will benefit
    from increased sales. This may lead to job creation and lower unemployment,
    especially in export industries. The increase will help Aggregate Demand (AD)
    to increase and therefore lead to higher economic growth.

    Figure 1 shows the effect of depreciation in exchange rate.


    In a fall in exchange rate on the current account of the balance of payments, a
    depreciation will tend to improve the current account balance of payments
    which is because exports increase relative to imports. However, this assumes
    that demand for exports and imports are relatively elastic. In the short-term,
    demand for exports may be inelastic so there is no improvement in the current
    account. However, over a longer period of time, demand becomes more elastic
    and so there is an improvement in the current account. 

    Figure 2 shows the US dollar depreciation in 2001-2008. The steady fall in the
    dollar 2001-2008 was generally a period of positive economic growth. Inflation
    remained low during this period, apart from import prices rising, because
    inflationary pressures were generally low.

    To recap, the winners of a fall in exchange rate are exporters, domestic tourist
    industry, workers gaining jobs in export industry, economic growth might
    increase and current deficit that should improve. The losers are consumers who
    buy imports, residents who holiday abroad, firms who buy imported raw
    materials, those on fixed incomes who see inflation rise faster and foreign
    exporters.

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