International Journal of Scientific & Engineering Research, Volume 7, Issue 5, May-2016 131

ISSN 2229-5518

How Exchange Rate Influence a Country’s Import

and Export
Khaled Alotaibi

Abstract- Businesspersons and governments all over the globe are very serious about the severe results of currency appreciation and

depreciation on different things such as imports, exports, domestic products, etc. Academic researchers conducted many researches in order to explore

the impact of currency fluctuations on the import and export of the country as well. Many researchers concluded that G-7 countries exports and imports

took the effect due to currency fluctuations during the period of 1982-1997. Depreciation in exchange rate increases the domestic currency value and

decreases the value of our own currency as well. If our own country currency rate increases due to foreign exchange rate declines then the domestic

country can import the goods at cheap prices. In contrast if the home country currency decreases due to an increase in exchange rate then the imports

of the home country will decreases due to increasing in other country prices as well. If the domestic currency appreciates due to declining in exchange

rate the domestic country exports will bring the high foreign exchange for the country and vice versa. When some countries currency increases or

decreases, it brings the changes in the whole business of the country at very much extent (Kandil, Berument, & Dincer, 2007)).

IJSER
——————————  ——————————

Introduction decreases due to an increase in exchange rate then

Businesspersons and governments all the imports of the home country will decreases due to

over the globe are very serious about the severe increasing in other country prices as well. If the

results of currency appreciation and depreciation on domestic currency appreciates due to declining in

different things such as imports, exports, domestic exchange rate the domestic country exports will bring

products, etc. Academic researchers conducted the high foreign exchange for the country and vice

many researches in order to explore the impact of versa. When some countries currency increases or

currency fluctuations on the import and export of the decreases, it brings the changes in the whole

country as well. Many researchers concluded that G-7 business of the country at very much extent (Kandil,

countries exports and imports took the effect due to Berument, & Dincer, 2007)).

currency fluctuations during the period of 1982-1997.

It is an ongoing debate especially in
Depreciation in exchange rate increases the domestic
developing countries. The fluctuations level may take
currency value and decreases the value of our own
the effect of country internal and external shocks in
currency as well.
financial of other trading partners. It has been

If our own country currency rate increases discussed that due to globalization evolution the one

due to foreign exchange rate declines then the country financial brings the change in the other

domestic country can import the goods at cheap financial structure also. The reason is that the

prices. In contrast if the home country currency countries are interlinked now days. They have
IJSER © 2016
http://www.ijser.org
International Journal of Scientific & Engineering Research, Volume 7, Issue 5, May-2016 132
ISSN 2229-5518

become a global partner in trade. The imports and exchange rates into account. In the free market

exports are also because the currency of one Imports and exports determine and affect the

importing and other exporting country was exchange exchange rate though governments and financial

when transaction took place. institutions in their audacity feel they control it. In

the same way that supply and demand for

products shift to change the prices of those

Exchange rate is a rate at which currencies products, the constant shifts in the supply and

are exchanged between countries. It’s also known as demand for foreign currency result in changing

the value of one countries’ currency in terms of other prices of currency. As a result, the “price” of

countries’ currency. For example, an interbank money changes as demand for foreign currencies

exchange rate of 91 Japanese yen (JPY, ¥) to the changes. This “price” of foreign currency, in

United State dollar (US$) means that ¥91 will be terms of U.S. currency, is known as the foreign

exchanged for each US$1 or that US$1 will be exchange rate.

IJSER
exchanged for each ¥91. • Exporting goods and Importing raw material:

Effect of Exchange rate on Exports and Imports of a If the exchange rate falls, this changes the relative

Country: prices of imports and exports. Exports will appear to

become relatively cheaper in other currencies, and

• Exchange rates can be manipulated so that they
imports will appear to be more expensive. Because
deviate from their natural equilibrium rate. To
we buy imports, they are included as part of the retail
stimulate exports, rates would be held down, and
price index, and so if the price of imports goes up, this
to reduce inflationary pressure rates would be
could be inflationary.
kept up. The Monetary Policy Committee (MPC)

w The effects on aggregate demand may compound this

i inflationary impact. Since exports are relatively

l cheaper overseas, this should increase the demand

l for them. In addition the demand for imports should

t fall. The combination of the two will have a positive

a impact on aggregate demand because net exports is

k one of the components of the AD function (AD=

e C+I+G+(X-M) How much the demand increases

depends on the price elasticity of demand for exports,

IJSER © 2016
http://www.ijser.org
International Journal of Scientific & Engineering Research, Volume 7, Issue 5, May-2016 133
ISSN 2229-5518

but the demand should certainly grow. Growth in

aggregate demand could also be inflationary if the

economy is close to its capacity. On the diagram

below you can see the shift in aggregate demand

(AD1 to AD2) pulling up the price level (demand-pull

inflation).

IJSER
Impact of appreciation on business:

It cannot be denied from the fact that economies

take the effect of fluctuations in the foreign exchange

rate of a domestic country or its trading partners as

well. When economies of countries take the effect,

Impact on importers of raw material: this effect is diversify on almost all businesses of the

country. When countries exchange rate increases the

Exchange rate affects value of imports of a country
import of that countries went toward decrement. If the
directly, if a person is importing raw material from any
countries exchange rate decreases the import of that
other country to make finished goods. If the exchange
countries increases. If some countries exchange rate
rate of the country is at a lower side then its importers
increases the exports of those countries, decreases
have to pay high price of raw material purchased
and companies earn more against their export. If the
because the value of their currency is low in the other
exchange rate of that country decreases, the exports
country, and vice versa
of that country will also increases. What is the logic

behind this system? A great chain is working behind

this system. When domestic country currency

appreciates the people, of that country purchasing

power, increases, and they demand more luxury

IJSER © 2016
http://www.ijser.org
International Journal of Scientific & Engineering Research, Volume 7, Issue 5, May-2016 134
ISSN 2229-5518

products due to which county overall business takes that the businesses takes the effects and spread it in

the effect of it, and, imports increased. all over the country because businesses are linked

with other institutions in order to run it smoothly.

If the domestic country currency depreciates, the
These businesses such as the textile mill is linked
individuals of that country do not have much money,
with importers, suppliers, financial institution,
and inflation has increased due to which the prices of
governments and other human capital these all are
the domestic goods increased. Along with the
interlinked due to which the change in one component
increment in prices of the domestic products
affects the other partner. It might be possible that the
increases because the imports have been stopped by
effect may be small or long. Therefore, the end it can
the businesspersons and the demand of domestic
be said that the depreciation of the country at any
products also has been increased. Therefore, we can
level is bad for the country business persons,
say that the increases in currency rate results a
governments, economy and even very small segment
decrease in the import of that country (Dausa, 2009)
of population (Heim, 2009).

IJSER
When imports level went down the business,
The one more important thing is also notable that
become worry because almost everywhere the
the currency depreciation may lead down the
imported products are necessary in order run the
aggregate demand of that country. The supply side
industry of the domestic country. For example, if our
channels become more difficult when the currency
country imports the cotton from china and the
depreciation took place at very large level. All the
currency rate has increased due to which our industry
factors are affected because the currency of the
that raw material is cotton will not continue its
country is the main source of exchange. In the end, it
businesses smoothly. On the other hand if the
can be concluded that depreciation of the country
currency rate of our country will decrease the imports
increases exports but along with that cost of exported
of our country will increases and our business
products increases accordingly while currency
community will run their businesses smoothly. If one
appreciation decreases the exports, and the cost of
country exchange rate increases the exports of this
production also decreases accordingly. The demand
country will go down because the imports have been,
and supply channels finalize the exchange rate
go down.
results such as output and prices of the products.
The prices of the raw material for products have
Evaluation of the changes within the exchange
been increased because in our own country demand
rate on business:
for that product has been decreased as well. One

more thing that is too important and considerable is

IJSER © 2016
http://www.ijser.org
International Journal of Scientific & Engineering Research, Volume 7, Issue 5, May-2016 135
ISSN 2229-5518

• Elasticity. The impact of an appreciation import raw materials. Business strategies and

depends upon the price elasticity of demand movement entirely depends on the exchange rate of a

for exports and imports. country. In addition to its direct effects on the global

• The impact of an appreciation depends on trading and production structure, the ongoing process

the situation of the economy. If the economy of globalization may have important implications for

is in a recession, then an appreciation will the interaction of exchange rates and the overall

cause a significant fall in aggregate demand, global economy.

and will probably contribute to higher

Elaborating on the significance, the
unemployment. However, if the economy is
exchange rate expresses the national currency's
in a boom, then an appreciation will help
quotation in respect to foreign ones. For example, if
reduce inflationary pressures and limit the
one US dollar is worth 10 000 Japanese Yen, then the
growth rate.
exchange rate of dollar is 10 000 Yen. If something
•

IJSER
It also depends on economic growth in other
costs 30 000 Yen, it automatically costs 3 US dollars
countries.
as a matter of accountancy.
• It also depends why the exchange rate is

increasing in value. If there is an The global floating exchange rate system

appreciation because the economy is operation forces the market demand and supply,

becoming more competitive, then the determining the daily value of one currency against

appreciation will not be causing a loss of another. The system affect exchange rate on

competitiveness. But, if there is an business, tend to go up in value when a country is

appreciation because of speculation or running a large trade surplus and when overseas

weakness in other countries, then the investors regard the currency as a good one to buy.

appreciation could cause a bigger loss of

In determining the types of the exchange rate. It is
competitiveness
customary to distinguish nominal exchange rates

from real exchange rates. Nominal exchange rates

are established on currency financial markets called

• Evaluation of the changes within the
"forex markets", which are similar to stock exchange
exchange rate on business:
markets. Rates are usually established in continuous

quotation, with newspaper reporting daily quotation

The exchange rate in a business plays an
(as average or finishing quotation in the trade day on
important role for the country, which export goods and

IJSER © 2016
http://www.ijser.org
International Journal of Scientific & Engineering Research, Volume 7, Issue 5, May-2016 136
ISSN 2229-5518

a specific market). Central bank may also fix the influence of the economy can have powerful effects

nominal exchange rate. on the macro economy affecting variables such as the

demand for exports and imports; real GDP growth,

The regime includes when the exchange rate
inflation, business profits and jobs. With most
can freely move, assuming any value that private
variables in economics, there are time lags involved.
demand and supply jointly establish, "freely
The impact of movements in currencies on the
floating exchange rate" will be the name of currency
economy depends in part on whether the change in
institutional regime. Equivalently, it is called "flexible"
the currency is short-term or long-term. Further
exchange rate as well. If the central bank timely and
elaboration would mean to identify the change in the
significantly intervenes on the currency market, a
exchange rate temporary or likely to persist for some
"managed floating exchange rate regime" takes place.
time? And how businesses and consumers
The central bank intervention can have an explicit
respond to exchange rate fluctuations. Meaning will
target, for example in term of a band of currency
there be a large change in demand for exports and

IJSER
acceptable values.
imports?

In "freely" and "managed" floating regimes, a

It is important to identify possible changes in the
loss in currency value is conventionally called
role of exchange rates in a more globalized economy.
”depreciation", whereas an increase of currency's
Analyses the link between exchange rates and prices,
international value will be called "appreciation". If the
shows that there is a moderate decline in exchange
dollar rise from 10 000 yen to 12 000 yen, then it has
rate pass-through for the euro area. Next, it turns to
shown an appreciation of 20%. Symmetrically, the
the effect of exchange rate changes on trade flows. In
yen has undergone 8.3% depreciation. But central
addition, the overall impact of exchange rates on GDP
banks can also declare a fixed exchange rate, offering
and the potential role of valuation effects as a
to supply or buy any quantity of domestic or foreign
transmission channel in the case of the euro area.
currencies at that rate. In this case, one talks of a

"fixed exchange rate". In Exchange rate the term, Appreciation makes

exports more expensive and reduces the

Exchange rate on business directly effects
competitiveness of exporting firms. Depreciation
on the global trading and production structure, the
makes exports cheaper and the exporting firms will be
ongoing process of globalization may have important
positively impacted by it. Exchange rate devaluation
implications for the interaction of exchange rates and
(or depreciation) gives rise to inflationary pressures:
the overall economy. Change in the exchange rate
imported good become more expensive both to the

IJSER © 2016
http://www.ijser.org
International Journal of Scientific & Engineering Research, Volume 7, Issue 5, May-2016 137
ISSN 2229-5518

direct consumer and to domestic producer using them investments, which determine the portfolio are real

for further processing. In reaction to inflation (actual return. As supply and demand for currencies change,

and feared), the central bank can raise the interest the values of those currencies change. When the U.S.

rates, thus sending a recessionary impulse. dollar is strong, imports seem less expensive, leading

to increased demand for imported products and the

Currency crisis have a sweeping impact on
currency needed to purchase them. In addition, when
income distribution. The few rich are able to
interest rates in another nation are higher than those
borrow (because they have collateral and the
in the U.S., demand for the foreign currency rises, as
banks trust them) will get richer and the
people buy the currency in order to invest in the other
people purchasing imported goods facing
nation’s securities. A declining exchange rate
inflation and reduction of real incomes.
obviously decreases the purchasing power of income
Symmetrically, the central bank may use a
and capital gains derived from any returns. Therefore,
fixed exchange rate as a nominal anchor for
a trade deficit develops as the result of a strong

IJSER
the economy to keep inflation under control,
dollar. The opposite effects result from a weak U.S.
compelling domestic producer to face
dollar. While importers prefer a strong dollar,
tougher competition as soon as they decide
exporters prefer a weak dollar.
to increase prices or accept to pay
Moreover, the exchange rate influences
higher wages. For a small economy, joining
other income factors such as interest rates, inflation
a monetary union makes the exchange rate
and even capital gains from domestic securities.
to fluctuate according to fundamentals and
While exchange rates are determined by numerous
market pressures referring to a much larger
complex factors that often leave even the most
area, erratically going in directions that are
experienced economists flummoxed, investors should
(or are not) coherent with positive
still have some understanding of how currency values
macroeconomic developments. For statistics
and exchange rates play an important role in the rate
purposes, international comparisons of
of return on their investments. Therefore, the effects
current values converted to a common
of currency crises in other nations are not limited to
currency are "distorted" by wide exchange
those nations -- they can affect our economy and our
rate fluctuations
lives in important ways.
Conclusion:

The exchange rate of the currency References:

occupies a portfolio that holds the bulk of its

IJSER © 2016
http://www.ijser.org
International Journal of Scientific & Engineering Research, Volume 7, Issue 5, May-2016 138
ISSN 2229-5518

Dausa, J. (2009). Exchange Rate Shocks on

Malaysian Prices of Imports and Exports: An empirical http://papers.ssrn.com/sol3/papers.cfm?bstr
analysis. Journal of Economic Cooperation and act_id=1144484
Development , 99-114.
McGowan, C. (2008). Evaluating the Impact
Heim, J. J. (2009). THE REAL EXCHANGE
RATE AND THE U.S. ECONOMY 2000- of Foreign Exchange Rate Risk On The
2008. Troy, New York: Rensselaer Capital Budgeting For Multinational
Polytechnic Institute.
Firms. International Business & Economics
Kandil, M., Berument, H., & Dincer, N. N.
(2007)). The effects of exchange rate Research Journal, 7(8).
fluctuations on economic activity in Turkey. SCHULMEISTER, S. (2000). Globalization
Journal of Asian Economics , 466–489.
without global money: The double role of the

Lessard, D., & Lightstone, J. (1986, July dollar as national currency and world

1). Volatile Exchange Rates Can Put currency. Journal of Post Keynesian

Operations at Risk. Economics, 22(3).

1. http://www.economicsonline.co.uk/Managing
https://hbr.org/1986/07/volatile-exchange- _the_economy/Exchange_rate_policy.html

IJSER
2. http://www.articlesbase.com/currency-
rates-can-put-operations-at-risk trading-articles/theories-of-foreign-exchange-
2828074.html
Mauro, F., Rueffer, R., & Bunda, I.

(2008, September 8). The Changing Role of

the Exchange Rate in a Globalised

Economy.

IJSER © 2016
http://www.ijser.org
International Journal of Scientific & Engineering Research, Volume 7, Issue 5, May-2016 139
ISSN 2229-5518

IJSER

IJSER © 2016
http://www.ijser.org