Exchange rate means the price of one currency in terms of another currency or currencies.
How does a change in the exchange rate influence the economy:
From tutor2u , we can see change in exchange rate effect the demand for exports and imports; real GDP growth, inflation and unemployment .
Exports and imports:if the exchange rate fall in a country,the price of exports also decrease but the value of exports will increase. Opposite, the price of imports will goes up and the value of it will decrease.a rise in the exchange rate, is likely to result in a fall in net exports.
Real GDP growth:(not really understand this, if you know , can you help me ,,thx:))
Inflation: if exchange rate goes up. That means the interest rate goes up as well, so people would like save more money in bank which means the AD decrease, it helps inflation get lower. And also if the exchange rate goes down, which means interest rate decrease, leading to more investment and low save from people, the AD will increase, with this situation, inflation will rise.
Unemployment: as well as inflation, change in exchange rate effect the rate of unemployment , because if exchange rate goes up, may leading to economic growth, and consumption will raise , so the AD will increase , and producer need recruit more labour to improve productivity to satisfy the needs of consumer. So it is helps decrease the unemployment. Exchange rate goes down is the opposite.
Advantages of exchange rate goes up:
1. lower imports price
2. Lower cost for producer
3. Lower inflation
Disadvantages of exchange rate goes up:
1. Increase the trade deficit: if imports goes up , the demand of it will get rise, and for domestic goods , people may prefer imports goods, it because the price of imports good may cheaper than domestic goods. And it may leading to balance f payment deficit. The government need control this.
2. Slower economic growth
3. Low elasticity of demand:In the short term, the effects of exchange rates on export and import demand tends to be low because of low price elasticity of demand
4.Cutting their export prices when selling in overseas markets and therefore accepting lower profit margins to maintain competitiveness and market share
Hello
13 years ago
3 comments:
"Real GDP growth:(not really understand this, if you know , can you help me ,,thx:))"
Lex - please answer
Real GDP growth,which is also means "economic growth".Economic growth is an increase in the number of outputs of goods and services over a period of time.To easy understand,economic growth also occurs when there's an increase in the full capacity of outputs,so there are more outputs in an economy.So how balance of payment affect on it?
If the exchange rate goes down,so exports will be cheaper and imports will be more expensive.Therefore,there will more exports and less imports.As we know the component of the Aggregate Demand is (X-M).So more exports and less imports will leads to an increase in AD,which will shift to the right(diagram).So if in a country there will be an increase in AD,so producers have to produce more outputs to satisfy consumers and meet consumer's needs.....
So an increase in the number of output will leads to economic growth!
Oh ye!Good luck in Economics!=)
your blog is very good......
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