Exchange rates affect trade balances from "summary" of Principles of Economics by Saifedean Ammous
Exchange rates play a critical role in determining the trade balances between countries. When a country's currency depreciates relative to another country's currency, its exports become cheaper for foreign buyers, leading to an increase in demand for its goods and services. This increase in demand for exports can help boost the country's trade balance by increasing exports and reducing imports. Conversely, when a country's currency appreciates, its exports become more expensive for foreign buyers, which can lead to a decrease in demand for its goods and services. This decrease in demand for exports may result in a trade deficit as exports decrease and imports increase. Therefore, changes in exchange rates can have a significant impact on a country's trade balance. Additionally, exchange rate fluctuations can also affect the competitiveness of a country's exports in the global market. A country with a depreciated currency may find its exports more competitive compared to countries with stronger currencies. This competitiveness can lead to an increase in market share for the country's exports, further improving its trade balance.- A country with an appreciated currency may struggle to compete in the global market as its exports become more expensive. This decrease in competitiveness can lead to a decline in exports and a deterioration of the country's trade balance. Overall, exchange rates can influence the trade balances of countries by impacting the demand for exports, the competitiveness of exports, and ultimately, the overall trade performance of a country.
