Answer to Question #92181 in Macroeconomics for MASIA ROTENDA

Question

EXPLAIN HOW CHANGES IN EXCHANGE RATE CAN INFLUENCE EXPORTS AND IMPORTS

Answer 1

A strong domestic currency negatively affects domestic companies that export goods to other countries.Since the goods are priced in domestic currency the exports become more expensive for foreign buyers that are obliged to pay for them in foreign currencies.The value of profits shrink when they convert profit to domestic currency.

A strong domestic currency favor imports.When the currency is strong domestic consumers buy imported goods cheaply,making domestic products relatively expensively.

Additionally, when the domestic currency makes prices of imported raw materials such as steel increase and consequently cause an increase in motor vehicle prices manufactured domestically.