What do changes in foreign currencies do to trade?
1 Answer
Due to exchange rates variations, imports and exports are stimulated or destimulated, depending on the type of variation.
It's important to bear in mind the concept of exchange rate: the price of foreign currency, expressed in national currency.
Also, we must remember that international trade is priced in dollars, so whatever is traded must be converted to dollars.
Now, let's relate both concepts: if domestic exchange rate is low, it means that 1 dollar can buy more of local currency in comparison to when the rate was higher. That means that a devaluation of national currency via exchange rate will make those national goods relatively cheaper for foreign buyers, as its price in dollars will fall.
On the other hand, a valuation of national currency via exchange rate will result in a stronger currency for national buyers, thus, turning imports into easier-to-buy.
In a nutshell:
- National exchange rate devaluated: stimulates exports and destimulates imports.
- National exchange rate valuated: simulates imports and destimulates exports.
