Exporters suffer when their home currency depreciates and prosper when it appreciates. True or false? and why?
When the Euro first was introduced, 1 Euro was worth about one U.S. dollar. At that time a U.S. exporter who could sell his widget for $1.00 in the U.S. would get about the same amount for exporting it to Europe.
Today, the Euro is worth about U.S. $1.57. The dollar has depreciated and is now worth only about 0.64 Euro. The exporter now must either charge Europeans more for his widget (not likely) or lose money.
so the answer is false?
Evidentally I didn't explain my answer very well. Please check your text materials.
False.
exporters love when the home currency depreciates and hate when it appreciates. Take Ms Sue's example. Say a firm has a good which it sells for $1. Initially, europeans could take 1 euro, exchange for $1, and buy the good. Today, a european could take .64 euros, exchange for $1 and buy the good. That is, price went down in europe which should increase quantity demanded, yet the producer still gets the same $1 per unit.
but did ms. sue imply that the answer is true?
True. Exporters typically suffer when their home currency depreciates and prosper when it appreciates.
When a country's currency depreciates, it means that its value decreases compared to other currencies. This has several impacts on exporters:
1. Increased export competitiveness: When the home currency depreciates, the prices of goods and services produced in that country become relatively cheaper for foreign buyers. This makes exports more affordable, potentially increasing demand for products from that country. As a result, exporters can benefit from increased sales and market share.
2. Higher export revenue: When the home currency depreciates, the revenue earned from exported goods, when converted back into the domestic currency, tends to increase. This is because foreign buyers are paying more of their own currency to buy the same amount of goods. The increased revenue can lead to higher profits for exporters.
On the other hand, when the home currency appreciates, it means that its value increases compared to other currencies. This has the opposite effect on exporters:
1. Decreased export competitiveness: When the home currency appreciates, the prices of goods and services produced in that country become relatively more expensive for foreign buyers. This can make exports less attractive and reduce demand for products from that country. Exporters may face difficulties in maintaining market share or increasing sales.
2. Lower export revenue: When the home currency appreciates, the revenue earned from exported goods, when converted back into the domestic currency, tends to decrease. Foreign buyers are paying less of their own currency to buy the same amount of goods. This can lead to lower profits for exporters.
Overall, exporters benefit from a depreciating home currency as it improves export competitiveness and increases revenue in the domestic currency. However, they may face challenges and lower profits when the home currency appreciates.