Question

Will you always appreciate the rise in the exchange rate as a means to boost our exports?

Answer 1

No. A rise in the exchange rate may not always lead to a rise in our export earnings. A rise in the exchange rate is beneficial only when the elasticity of demand for our exports is greater than unity. Because it is only then that the total expenditure on our exports will rise in response to a fall in prices of domestic goods in terms of the foreign currency. In other words, a fall in prices of domestic goods (in terms of foreign currency) yields greater revenue only when the elasticity of demand for our exports is greater than unity.