Consequences of Changes in the Exchange Rate

Unemployment

• • Currency depreciation will make exports cheaper to other countries, increasing their demand. This will mean more employment is needed.

  • Currency appreciation will make exports more expensive for other countries, decreasing their demand. This will mean less employment is needed, increasing unemployment rates.
    
    

Current account balance

• • A current account is a record of all imports, exports, and any other movement of money between one country and others (this is covered more in the next chapter). Basically, how much net money is flowing into the economy.

  • With depreciated currencies, exports will increase and imports will decrease, as explained in the diagram above. This means the current account will become more positive.

  • With appreciated currencies, exports will decrease and imports will increase, also as explained above. This means the current account will become more negative.
    
    

Living standards

• • The factors previously mentioned all show that a depreciating currency is perhaps more desirable. However, when it comes to living standards, the opposite can happen.

  • This is because many countries rely on imports for necessities such as food and machinery. Hence, when their currency depreciates, these goods become more expensive for them.

  • However, this does not mean an appreciating currency is any better. Appreciation will make exports more expensive for other countries, meaning domestic firms will earn less revenue. This could reduce economic growth.