Answer to Question #222223 in Macroeconomics for Fuse

Question

Effects of the exchange rate on the balance of payments

Answer 1

Solution:

Any fluctuations in the exchange rate can alter the balance of payments. An increase or appreciation of the exchange rate tends to raise imports and decrease exports, including decreasing competitiveness and, therefore, diminishing or reducing the balance of payments and trade.

On the other hand, a decrease or depreciation of the exchange rate tends to increase exports and makes imports more expensive including increasing competitiveness, therefore improving the balance of payments and trade.