I asked this question couple days before.
Exporters suffer when their home currency depreciates and prosper when it appreciates. True or false? and why?
Can I explain it this way, it is false because, let say the exchange rate is 1 $/euro, and then dollars depreciated to 1.57 $/euro.
US is the home country.
A imported good from US (US exports)costs 1 euro in Europe, US exports will then get $1.
Then when it depreciated, the good costs 1 euro in Europe, now US exporters get $1.57.
(Can i assume the price stays constant at 1 euro?)
Does this make sense?
Although I was off base when I first answered your question, Economyst explained that false is the right answer. Your answer agrees with what he posted -- and it makes sense to me! :-)
In fact the price in Euros would probably come down somewhat as long as the thing still looks cheaper than before in Euros and more would be sold. The exporter could raise his export price in dollars somewhat and still sell more and make more dollars both on the increased volume and the increased price in dollars but decreased price in Euros.
Your explanation is partially correct, but there are a few important concepts to consider when determining whether exporters suffer when their home currency depreciates and prosper when it appreciates.
First, let's define currency depreciation and appreciation. Currency depreciation refers to a decrease in the value of a country's currency relative to another currency, while currency appreciation refers to an increase in the value of a country's currency relative to another currency.
Now, let's analyze the impact of currency depreciation and appreciation on exporters:
1. Currency Depreciation:
When a country's currency depreciates, it means that the foreign currency (in your example, the euro) becomes relatively stronger compared to the home currency (in your example, the US dollar).
- How exporters suffer: When a country's currency depreciates, the prices of domestically produced goods become cheaper in foreign markets. As per your example, if the exchange rate moves from 1 $/euro to 1.57 $/euro, US exporters will receive more dollars for each unit sold in Europe. While this may seem beneficial, it also means that their goods become relatively more expensive for foreign buyers. Consequently, demand for US exports may decrease, leading to a potential decline in the exporter's sales and profits.
2. Currency Appreciation:
When a country's currency appreciates, it means that the foreign currency (euro) becomes relatively weaker compared to the home currency (US dollar).
- How exporters prosper: When a country's currency appreciates, the prices of domestically produced goods become relatively cheaper in foreign markets. In this case, US exporters would receive fewer dollars (let's say, from 1.57 $/euro to 1 $/euro). Their goods would become more affordable for foreign buyers, potentially increasing the demand for US exports and leading to higher sales and profits for exporters.
Therefore, the correct statement would be: Exporters suffer when their home currency appreciates and prosper when it depreciates.
It's important to note that this is a simplified explanation and doesn't take into account all the factors that can impact exports, such as the price elasticity of demand, competition, and market dynamics. Additionally, exchange rates can also be influenced by numerous factors beyond just the strength of a country's exports, including interest rates, inflation, political stability, and more.