Discuss whether an appreciation in the exchange rate is to the advantage of an economy
Discuss whether an appreciation in the exchange rate is to the advantage of an economy.
An appreciation is an increase in the rate of one currency in terms of another. A currency will appreciates when the demand for the currency is more that it supply.
When a currency appreciates, the price of their goods and services will increase. This will then lead to higher price of exports and resulting in lower demand of exports. Thus export receipts fall. At the same time, the price of import goods and services will become expensive. This will lead to lower price of imports and resulting in higher demand of imports. Thus import payments increase. As a result, this will worsen the balance of payment and contribute to the current account deficit. This is the case when price elasticity of demand of the goods and services is elastic. This is because a small increase in price will lead to a larger fall in quantity demanded and larger fall in total revenue. In addition, if the appreciation is in a long run, foreign countries will switch to buy from other countries or find substitutes rather than buying from our country. AS a result, our demand for exports will fall and resulting in lower export receipts.
Besides that, when a currency appreciates, investments from foreign to our country will fall. This is because it is more expensive to invest in our country. As a result, lesser investment will lead to lesser inflow of money and lower production in the economy. When production falls, number of workers needed decrease as well and this lead to an increase in unemployment in the country. As a result, higher unemployment leads to lower income and hence lower standard of living.
On the other hand, when a currency appreciates, people from the country will tend to switch to cheaper imported goods and services. In this case, domestic firms will lose their competitiveness as imported goods are cheaper than theirs. Thus, demand for local goods and services fall and domestic firms
An appreciation is an increase in the rate of one currency in terms of another. A currency will appreciates when the demand for the currency is more that it supply.
When a currency appreciates, the price of their goods and services will increase. This will then lead to higher price of exports and resulting in lower demand of exports. Thus export receipts fall. At the same time, the price of import goods and services will become expensive. This will lead to lower price of imports and resulting in higher demand of imports. Thus import payments increase. As a result, this will worsen the balance of payment and contribute to the current account deficit. This is the case when price elasticity of demand of the goods and services is elastic. This is because a small increase in price will lead to a larger fall in quantity demanded and larger fall in total revenue. In addition, if the appreciation is in a long run, foreign countries will switch to buy from other countries or find substitutes rather than buying from our country. AS a result, our demand for exports will fall and resulting in lower export receipts.
Besides that, when a currency appreciates, investments from foreign to our country will fall. This is because it is more expensive to invest in our country. As a result, lesser investment will lead to lesser inflow of money and lower production in the economy. When production falls, number of workers needed decrease as well and this lead to an increase in unemployment in the country. As a result, higher unemployment leads to lower income and hence lower standard of living.
On the other hand, when a currency appreciates, people from the country will tend to switch to cheaper imported goods and services. In this case, domestic firms will lose their competitiveness as imported goods are cheaper than theirs. Thus, demand for local goods and services fall and domestic firms