Topic 6.5: Changes in the Foreign Exchange Market and Net Exports

Currency Appreciation

A rise in a country’s currency value relative to another currency.

Effects of Currency Appreciation on Exports

Exports decrease because goods become more expensive for foreign buyers.

Effects of Currency Appreciation on Imports

Imports increase because foreign goods become cheaper for domestic consumers.

Net Exports (Xn) with Currency Appreciation

Net exports decrease due to lower exports.

Effects of Currency Appreciation on Aggregate Demand (AD)

Lower net exports reduce aggregate demand.

Currency Depreciation

A fall in a country’s currency value relative to another currency.

Effects of Currency Depreciation on Exports

Exports increase because goods become cheaper for foreign buyers.

Effects of Currency Depreciation on Imports

Imports decrease because foreign goods become more expensive for domestic consumers.

Net Exports (Xn) with Currency Depreciation

Net exports increase due to higher exports.

Effects of Currency Depreciation on Aggregate Demand (AD)

Higher net exports increase aggregate demand.

Definition of Net Exports (Xn)

The value of exports minus imports.

Definition of Aggregate Demand (AD)

The total demand for goods and services in an economy.

Impact of Higher Demand for Domestic Goods

Higher demand leads to currency appreciation and a decrease in exports.

Impact of Higher Interest Rates on Currency

Higher interest rates attract foreign investment, causing currency appreciation and a decrease in net exports.

Speculation in Currency Markets

Investors' expectation of currency appreciation increases demand for that currency.

Impact of High Inflation Rates on Exports

Higher inflation makes domestic goods less competitive, reducing exports and net exports.

Graphical Representation of Exchange Rate Changes

X-axis represents quantity of currency; Y-axis represents exchange rate.

Effect of Increased Net Exports on AD Curve

AD shifts right when net exports increase.

Effect of Decreased Net Exports on AD Curve

AD shifts left when net exports decrease.

Example of Currency Appreciation Impact

U.S. dollar appreciation makes U.S. exports more expensive, reducing net exports.

Example of Currency Depreciation Impact

Euro depreciation makes European exports cheaper, increasing net exports.

Takeaway on Currency Appreciation

Typically reduces net exports and slows economic growth.

Takeaway on Currency Depreciation

Typically boosts net exports and stimulates economic growth.