Consequences in the Change of Exchange Rate

High Exchange Rate

Advantages of a High Exchange Rate

• Downward pressure on inflation
  • Due to reduced production and final product costs thanks to cheaper imports.
• More imports can be bought 
• A high value of a currency forces domestic producers to improve their efficiency otherwise their products will be too expensive for foreign countries (international competitiveness)

Disadvantages of a High Exchange Rate

• A high exchange rate may cause increased imports as foreign goods are now cheaper in comparison.
  • As AD is defined as C+I+G+(X-M), if imports, M, increases, then AD will decrease.
  • If AD decreases then there will be unemployment.
• Damage to export industries (difficult to compete)
• Damage to domestic industries (imports relatively inexpensive, difficult to compete)
• Living standards
  • Countries overly reliant on tourism or trade can experience significant impacts on standards of living due to damage to the economy.
  • Unemployment caused by increased imports can also reduce living standards.

Low Exchange Rate

Advantages of Low Exchange Rate

• Greater employment in export industries, products are relatively inexpensive.
• Greater employment domestically,
  • In import industries, imports are more expensive than they were.
• This may encourage domestic consumers to buy domestically produced goods.

Disadvantages of High Exchange Rate

Inflation

• A low value of the currency will make imported final goods and services, imported raw materials and imported components more expensive.
  • This increases production costs, which reduces AS, causing an increased average price level.