Explain the effect of fall in price of foreign currency on exports

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Solution

DEAR STUDENT

Fall in price of foreign currency (domestic currency appreciation) implies that domestic currency has become more expensive in terms of foreign currency. For instance, if the exchange rate falls from $1 = Rs 50 to $1 = Rs 48 then we say that rupee has appreciated against the dollar. In such a situation the domestic country's export to foreign countries have become expensive (because now foreigners ca purchase only Rs 48 worth of goods instead of Rs 50 worth of goods). This reduces the demand for exports.

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Similar questions

(a) Balance of payment always balances. Explain.

(b) When the supply of foreign currency rises, the price of foreign currency falls. Justify the statement.

State any two factors that explain the contraction of supply of foreign currency when its price in terms of the domestic currency falls.

State any two factors that explain expansion of demand for a foreign currency in response to a fall in its price (in terms of the domestic currency).

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