IB Economics Topic 4.5.3 Consequences of Changes to the Exchange Rate Revision Notes (SL/HL)

IB Economics Topic 4.5.3 Consequences of Changes to the Exchange Rate Revision Notes (SL/HL) | RevisionDojo

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We have already discussed that changes in the exchange rate can influence a country’s imports.
But what is the reason behind this?
When the currency of an exporting country appreciates, goods become more expensive for foreign buyers, reducing demand for exports and causing net exports (X–M) to decrease.
When the currency depreciates, goods become cheaper for foreign buyers, increasing demand for exports and leading to a rise in net exports (X–M).
Currency appreciation or depreciation also impacts:
1. Inflation rate: appreciation lowers import prices, reducing inflation; depreciation raises import prices, increasing inflation.
2. Economic growth: appreciation dampens growth by reducing exports; depreciation stimulates growth through higher exports.
3. Unemployment: appreciation may raise unemployment in export industries; depreciation can lower unemployment by boosting demand.
4. Current account balance: appreciation worsens the balance as exports fall; depreciation improves it as exports rise.
5. Living standards: appreciation raises purchasing power for imports; depreciation reduces it due to higher import costs.

Inflation Rates

Demand-Pull Inflation

Since (X–M) is a determinant of aggregate demand (AD):

An increase in (X–M), caused by currency depreciation, leads to an increase in AD.
This rise in AD pushes up the price level, resulting in demand-pull inflation.
A decrease in (X–M), caused by currency appreciation, leads to a decrease in AD.

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We have already discussed that changes in the exchange rate can influence a country’s imports.
But what is the reason behind this?
When the currency of an exporting country appreciates, goods become more expensive for foreign buyers, reducing demand for exports and causing net exports (X–M) to decrease.
When the currency depreciates, goods become cheaper for foreign buyers, increasing demand for exports and leading to a rise in net exports (X–M).
Currency appreciation or depreciation also impacts:
1. Inflation rate: appreciation lowers import prices, reducing inflation; depreciation raises import prices, increasing inflation.
2. Economic growth: appreciation dampens growth by reducing exports; depreciation stimulates growth through higher exports.
3. Unemployment: appreciation may raise unemployment in export industries; depreciation can lower unemployment by boosting demand.
4. Current account balance: appreciation worsens the balance as exports fall; depreciation improves it as exports rise.
5. Living standards: appreciation raises purchasing power for imports; depreciation reduces it due to higher import costs.

Inflation Rates

Demand-Pull Inflation

Since (X–M) is a determinant of aggregate demand (AD):

An increase in (X–M), caused by currency depreciation, leads to an increase in AD.
This rise in AD pushes up the price level, resulting in demand-pull inflation.
A decrease in (X–M), caused by currency appreciation, leads to a decrease in AD.

Definition

Paywall

(on a website) an arrangement whereby access is restricted to users who have paid to subscribe to the site.

anim nostrud sit dolore minim proident quis fugiat velit et eiusmod nulla quis nulla mollit dolor sunt culpa aliqua

Duis aute irure dolor in reprehenderit

Note

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Excepteur sint occaecat cupidatat non proident

Tip

Lorem ipsum dolor sit amet, consectetur adipiscing elit.
Sed do eiusmod tempor incididunt ut labore et dolore magna aliqua.
Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris.
Duis aute irure dolor in reprehenderit in voluptate velit esse cillum.

1. Introduction to Economics2 subtopics

2. Microeconomics12 subtopics

3. Macroeconomics7 subtopics

4. The Global Economy10 subtopics

IB Economics 4.5.3 Consequences of Changes to the Exchange Rate Notes

1. Introduction to Economics2 subtopics

2. Microeconomics12 subtopics

3. Macroeconomics7 subtopics

4. The Global Economy10 subtopics

Inflation Rates

Demand-Pull Inflation

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Duis aute irure dolor in reprehenderit

Excepteur sint occaecat cupidatat non proident

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Inflation Rates

Demand-Pull Inflation

anim nostrud sit dolore minim proident quis fugiat velit et eiusmod nulla quis nulla mollit dolor sunt culpa aliqua

Duis aute irure dolor in reprehenderit

Excepteur sint occaecat cupidatat non proident

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