Effects of Falling Exchange Rates

Readers Question: When exchange rate goes down, what positive thing can happen?

• When there is a depreciation and the exchange rate goes down, the exports of a country will be cheaper and imports will become more expensive.
• e.g. a depreciation of the dollar makes US exports more competitive.
• Therefore there will be an increase in exports and decrease in quantity of imports. Therefore, domestic firms will benefit from increased sales. This may lead to job creation and lower unemployment, especially in exporting industries.
• The increase in X-M will help increase AD and therefore lead to economic growth
• The current depreciation in the US dollar is helping US exports. The boost in the US export sector is particularly beneficial because the US economy is currently facing a recession from lower consumer spending.
• A depreciation will also help improve the current account balance of payments. This is because exports increase relative to imports. However, this assumes that demand for exports and imports are elastic. (Marshall Lerner condition states that a depreciation improves current account deficit if PED x + PED m >1)

See also: Effects of an Appreciation in the exchange rate