Chapter 26 - Business and the International Economy
Learning Objectives: To understand the impact of exchange rate fluctuations in businesses
Do you know what is the exchange rate?
Simply put, the exchange rate is how much one country's currency is worth it of another country's currency.
Let's try to understand with an example (February 11, 2022):
₮ 1 is the equivalent of USD 0.0003.
- In other words, ₮ 1 is worth it a lot less than USD 1
USD 1 is the equivalent of ₮ 2,765.34.
- In other words, with USD 1 you can buy nearly 3 thousand Tugrik!
But how and why does the exchange rate fluctuate (go up and down)?
Demand and Supply For The Currency:
- When the demand for a currency is high - the price for that currency will raise:
A currency demand varies according to:
- The interest from investors to invest in the country;
- Interest from other countries in importing products from that country.
A demanded currency appreciates;
A low demanded currency depreciates.
Activity 26. 4 (p. 336)
How does the Exchange Rate impact businesses? It depends on whether your business is an exporter or an importer:
A depreciated currency favors exporters and harms importers:
- Exporters will have their goods sold cheaper internationally which increases their demand and sales;
- Importers of raw materials or finished goods will have to pay more for imports making their business less profitable.
A appreciated currency, on the other hand, favors importers:
- Importers will now find it cheaper to buy raw materials and finished goods and therefore their costs and consequentially sales will increase and potential expansion.
- Exporters: local exports will become more expensive internationally (less competitive), leading to decrease in sales, need for price reductions, and downsizing.
In a country's economy, the appreciation or depreciation of the Exchange Rate is also very impactful:
For a country that is a big importer (e.g. Mongolia), a currency depreciation might:
- Cause inflation because price of finished goods and raw materials will go up;
- Positively impact the BoP as the amount of exports is likely to increase;
- Cause appreciation of the currency: demand for the currency will be higher (exports).
For a country that is a big exporter (e.g. China), a currency appreciation might:
- Increase imports which will consequentially negatively impact the BoP;
- Decrease exports (negative impact on BoP) which leads to a fall in GDP and likely increase in unemployment rates.
- Reduce inflation as local businesses will face international competition (forced to decrease prices).
Generally speaking, appreciation makes it harder (more expensive) to sell products (exports) overseas. Most of the time it does not impact essential items (e.g. food items) locally.
To-Do List:
Exam Practice Questions (p. 339)
Chapter 26 - Business and the International Economy
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