- This topic has 5 replies, 2 voices, and was last updated 6 years ago by
.
- Posts
Hi Tutor,
BPP text books confused me when explaining the impact of “A higher exchange rate”.
They said that: “In case of a higher exchange rate, domestic goods are more expensive in foreign market so demand for exports falls.”
From my point of view, I suppose that increasing exchange rate makes domestic currency weaker -> Domestic goods are cheaper in foreign market -> Demand for exports increases. (For example: China is a typical example when making Yuan be cheaper in the foreign market by increasing the exchange rate.)
Could you please help me clarify this argument!?
Whether ACCA have a different convention about the exchange rate? (Increase exchange rate = Make domestic currency stronger)Thanks and best regards.
Suppose the exchange rate between the US$ and the Euro is $/€ 1.50
This means that 1 Euro is equal to 1.50$’s.
If the exchange rate increases to (say) $/€ 1.60, then 1 Euro is then equal to 1.60 $’s.
The exchange rate for the $ is higher – the $ is weaker (and the euro is stronger – it buys more $’s).
Therefore something exported to Euroland from the US for $100 is currently costing 100/1.50 = €66.67 in Euroland.
With the increased exchange rate it will now cost only 100/1.60 = €62.50 in Euroland.So US goods are now cheaper in Euroland and demand for exports will increase.
This is the way exchange rates are quoted in the exam. I do suggest that you watch my free lectures on foreign exchange and foreign exchange risk management.
I understood your explanation, you mean that “In case of a higher exchange rate, domestic goods are more expensive in foreign market so demand for exports increase”
=> Argument in BPP text book is wrong when they said demand for exports falls.
No – I mean what I wrote: US (home country) goods become cheaper in Euroland (foreign country) and therefore exports from the US to Euroland will increase. (Customers in Euroland will certainly not demand more if the price increases!!)
What BPP have written is correct.
In your example, demand for exports from US to Euro increases when exchange rate increases.
BPP said: “In case of a HIGHER exchange rate, domestic goods are more expensive in foreign market so demand for exports FALLS”
I agree what you wrote is correct, and II think what BPP said is incorrect, or BPP has another way to metion “exchange rate”. (Maybe they suppose Exchange rate = how much foreign currency is equal to 1 domestic currency (GBP)).
Hope you know my point.
- You must be logged in to reply to this topic.