Exchange rates impact international trade and investment from "summary" of The Economics of Money, Banking and Financial Markets, eBook, Global Edition by Frederic S. Mishkin
Exchange rates play a crucial role in determining the competitiveness of a country's goods and services in the global market. When a country's currency depreciates, its exports become cheaper for foreign buyers, leading to an increase in demand for its products. Conversely, a country with a strong currency may find its exports less attractive due to higher prices in foreign markets. This relationship between exchange rates and trade flows has significant implications for international trade and investment. A depreciating currency can boost a country's export sector, leading to an increase in economic activity and job creation. On the other hand, a strong currency can harm a country's export competitiveness, potentially leading to job losses and economic slowdown. In addition to trade, exchange rates also impact international investment decisions. Fluctuations in exchange rates can affect the returns on foreign investments, making them more or less attractive to investors. For example, a depreciation in the value of a foreign currency can increase the returns on investments denominated in that currency for a foreign investor when converted back to their home currency. Furthermore, exchange rate movements can influence the profitability of multinational corporations operating in multiple countries. Changes in exchange rates can impact the costs of production, the price competitiveness of products, and the value of overseas earnings when converted back into the company's home currency.- Exchange rates play a vital role in shaping international trade and investment patterns. Understanding the dynamics of exchange rate movements is crucial for policymakers, businesses, and investors to make informed decisions in a globalized economy.
