Economics – International trade and globalisation - Foreign exchange rates | e-Consult

The exchange rate significantly impacts a country's balance of trade (exports minus imports).

Currency Depreciation: A depreciation of a country's currency makes its exports cheaper for foreign buyers and imports more expensive for domestic consumers. This leads to an increase in exports (due to lower prices) and a decrease in imports (due to higher prices). The increased exports and decreased imports improve the balance of trade, leading to a trade surplus or a reduction in a trade deficit.

Currency Appreciation: An appreciation of a country's currency makes its exports more expensive for foreign buyers and imports cheaper for domestic consumers. This leads to a decrease in exports (due to higher prices) and an increase in imports (due to lower prices). The decreased exports and increased imports worsen the balance of trade, leading to a trade deficit or an increase in a trade surplus.

In summary, a depreciation generally improves the balance of trade, while an appreciation generally worsens it. However, other factors like price elasticity of demand for exports and imports also play a role in determining the ultimate impact.