Answer to Question #286894 in Macroeconomics for unknown

Question

Discuss the effects of currency appreciation and depreciation on international trade.

Answer 1

Currency appreciation is an increase in value compared to other currencies while depreciation is the fall in its value and both have an effect on the trade deficit. The trade deficit becomes worse if the local currency appreciates as imports become cheaper and exports become less profitable leading to a fall in domestic demand.

Currency depreciation has the opposite effect since the imports become more expensive than local products. This leads to increased exports and more profits to the country.