question_answer

(i) Explain the effect of depreciation of domestic currency on exports.

(ii) Explain the effect of appreciation of domestic currency on imports.

Answer:

(i) Depreciation of the domestic currency occurs when the value of our currency decreases in relation to the value of other currencies.                                                                   e.g., if US $ exchanges for Rs.55, instead of Rs.50 earlier, the domestic currency (Indian rupee) has shown depreciation. It means one dollar can be exchanged for more rupees. So, with the same amount of dollars, more of goods can be purchased from India. It means exports to USA have become cheaper. This may result in increase in export to USA.                                               (ii) Appreciation of domestic currency occurs when the value of our currency increases in relation value of other currencies.                                                                   e.g., if US . So, with the same amount of money (rupees), more goods can be purchased from USA. It means imports from USA have become cheaper. This may result in increase in imports from USA.