Impact of foreign exchange on the economy from "summary" of Oswaal NCERT One For All for UPSC & State PSC's Indian Economy Classes-9 to 12 (Old & New NCERT Edition) (For 2023 Exam) by Oswaal Editorial Board
The impact of foreign exchange on the economy is a crucial concept that affects various aspects of a country's economic performance. Foreign exchange refers to the exchange of one currency for another, which plays a significant role in determining a country's trade balance, inflation rate, and overall economic stability. When a country's currency strengthens against other currencies, it can lead to a decrease in the cost of imported goods. This, in turn, can lower inflation rates and improve the purchasing power of consumers. On the other hand, a weak currency can make imported goods more expensive, leading to higher inflation and reduced consumer spending. Moreover, fluctuations in foreign exchange rates can impact a country's trade balance. A strong domestic currency can make exports more expensive for foreign buyers, leading to a decrease in exports and a widening trade deficit. Conversely, a weak currency can make exports more competitive in the global market, boosting exports and improving the trade balance. Additionally, foreign exchange rates can also affect foreign direct investment (FDI) and foreign portfolio investment (FPI). A stable currency and favorable exchange rates can attract foreign investors, leading to increased capital inflows and economic growth. However, volatile exchange rates can deter foreign investors and lead to capital outflows, negatively impacting the economy.- The impact of foreign exchange on the economy is multifaceted and can have far-reaching effects on various economic indicators. It is essential for policymakers to monitor and manage foreign exchange rates effectively to ensure economic stability and growth.
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