Effect on Economy due to changes in Exchange Rates

Exchange rate changes occur due to a number of micro and macro economic factors. These are the result of currency fluctuations and in turn affect the economies of countries. The fluctuations in exchange rates due to currency fluctuation are a natural result and are true for the economies of most countries. A lot of the factors that affect the exchange rates of any currency have been mentioned above. The currencies keep on fluctuating in a continuous pattern, from one moment to the next one.

These changes in the exchange rates of a country that are a result of various micro and macro economic factors in turn affect the economy of that nation. People generally do not have any close idea of the effects of exchange rate changes on the economy because they deal mostly in the domestic currency and make payments in it as well. People believe that strong domestic country is a good thing which sometimes proves to be false as a continuously strong domestic currency can also prove to be a drag on the nation since the home country’s products will be much more expensive in the international markets and, hence, would be less competitive in place of the products of those countries whose currencies are not as strong. As a result, the home country might not have very good exports. But, as the international market items would be less expensive so they would be imported more. This would result in a negative trade balance.

On the other hand, if the domestic currency is weak in comparison to other currencies, then it would also pose a lot of problems for the people of that nation as it would make international travel more expensive and the cost of imported goods would also increase. If the cost of imported goods higher than its exports, it could also result in a negative trade balance.

Domestic currency’s value is a very important instrument in the setting up of the monetary policy and in all the central bank actions as well. it also effects the interest rates and many other important parts of the nation’s economy.

An increase in the exchange rate of a country’s currency would increase the purchasing power of the people of that country as they would be able to buy more foreign goods than before. For example, a US citizen can purchase a lot more clothes at cheaper rates from Pakistan than he or she can from their own country because for them Pakistani goods are much cheaper . Whereas, a decrease in the exchange rates of a country’s currency would decrease its people’s purchasing power as it would result in them being able to buy lesser international goods than before. A Pakistani purchasing a commodity from US would have to pay a lot more now than they had to in the 1990s because the exchange rates of Pakistani are much lower now than before as compared to US dollar. Higher exchange rates of a country would also mean higher standard of living of the people of that country. For example, a Pakistani living in the US would have to spend more money in acquiring goods and services there than here because of a high difference in currency values.