Discuss whether an appreciation in the exchange free essay sample

Discuss whether an appreciation in the exchange rate is to the advantage of an economy. An appreciation is an increase in the rate of one currency in terms of another. A currency will appreciates when the demand for the currency is more that it supply. When a currency appreciates, the price of their goods and services will increase. This will then lead to higher price of exports and resulting in lower demand of exports. Thus export receipts fall. At the same time, the price of import goods and services will become expensive. This will lead to lower price of imports and resulting in higher demand of imports. Thus import payments increase. As a result, this will worsen the balance of payment and contribute to the current account deficit. This is the case when price elasticity of demand of the goods and services is elastic. This is because a small increase in price will lead to a larger fall in quantity demanded and larger fall in total revenue. We will write a custom essay sample on Discuss whether an appreciation in the exchange or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page In addition, if the appreciation is in a long run, foreign countries will switch to buy from other countries or find substitutes rather than buying from our ountry. AS a result, our demand for exports will fall and resulting in lower export receipts. Besides that, when a currency appreciates, investments from foreign to our country will fall. This is because it is more expensive to invest in our country. As a result, lesser investment will lead to lesser inflow of money and lower production in the economy. When production falls, number of workers needed decrease as well and this lead to an increase in unemployment in the country. As a result, higher unemployment leads to lower income and hence lower standard of living. On the other hand, when a currency appreciates, people from the country will tend to switch to cheaper imported goods and services. In this case, domestic firms will lose their competitiveness as imported goods are cheaper than theirs. Thus, demand for local goods and services fall and domestic firms have to cut down production. The reduction supply will hence lower the gross domestic product and resulting in lower economic growth. In contrast, when a currency appreciates, the price of import for raw materials or intermediate goods will be cheaper. Thus, cost of production for local goods and services will be cheaper and hence demand for local goods and services will increase. This will resulting in local firms increase in their production and lead to employment level to increase. Moreover, lower cost of production of goods and services will also lead to lower level of cost push inflation. Furthermore, when a currency appreciates, for exports of goods and services with inelastic in price elasticity of demand, an increase in price of our exports will resulting in only a little all in quantity demanded. AS a result, our total revenue will increase as our strong currency enables us to sell our goods in higher price. As a result, export receipts us in settling debt when our currency appreciates. When our currency appreciates, our debt decreases. AS a result, we can take the opportunity to settle our foreign debt as the servicing of debt decrease. Thus, there will be less outflow of money and this improves current account deficit. In addition, an appreciation of currency leads onsumers to enjoy imported goods and services with a much lower price. Besides, the lower price of imported raw materials and intermediate goods which resulting in lower cost of production of local goods which then lead to lower price of finished goods allow customers to have a greater power of purchasing. Thus, their standard of living increases. In conclusion, theres always pros and cons for an appreciation in the economy. It depends on how the government make use of the appreciation and the intervention that the government takes.