Appreciations/Depreciations Impacts

• Exchange rate appreciation

  Currency increases in value
• Currency appreciates in value

  Imports become cheaper, exports become more expensive
• Imports becoming cheaper, exports becoming more expensive

  Net exports in the economy are likely to decrease
• Net exports decreasing


  Aggregate demand is likely to shift to the left
• Imports becoming cheaper


  Firms that import raw materials benefit from lower costs of production, shifting supply curve to the right and lowering cost-push inflation
• Impacts of currency appreciation


  • Lower growth
  • Higher unemployment in exporting industries
  • Higher unemployment in domestic industries that can't compete with cheaper imports
  • Lower demand-pull inflation
  • Lower cost-push inflation
  • Consumers benefit from cheaper imports and improved living standards
  • Potential for domestic firms to gain efficiency benefits from increased competition
• Exchange rate depreciation


  Currency decreases in value
• Currency depreciates in value

  Imports become more expensive, exports become cheaper
• Imports becoming more expensive, exports becoming cheaper


  Aggregate demand is likely to shift to the right
• Imports becoming more expensive

  Firms that import raw materials face higher costs of production, shifting supply curve to the left and increasing cost-push inflation
• Impacts of currency depreciation


  • Increased growth
  • Increased employment in exporting industries and domestic industries that benefit from reduced import competition
  • Higher demand-pull inflation
  • Higher cost-push inflation
• Factors to consider when evaluating exchange rate impacts

  • Extent of exchange rate change
  • Price elasticity of demand for exports and imports
  • Trade restrictions