Answer to Question #91954 in Macroeconomics for Nephalama Mashudu

Question

Explain how changes in exchange rates can influence exports and imports.

Answer 1

If the exchange rate falls, this changes the relative prices of imports and exports. Exports will appear to become relatively cheaper in other currencies, and imports will appear to be more expensive.

Exchange rates can be manipulated so that they deviate from their natural equilibrium rate. To stimulate exports, rates would be held down, and to reduce inflationary pressure rates would be kept up.

Exchange rate affects value of imports of a country directly, if a person is importing raw material from any other country to make finished goods. If the exchange rate of the country is at a lower side then its importers have to pay high price of raw material purchased because the value of their currency is low in the other country, and vice versa.

Change in exchange rate influence of the economy can have powerful effects on the macro economy affecting variables such as the demand for exports and imports; real GDP growth, inflation, business profits and jobs.