Question

The chapter explained why exporters cheer when their home currency depreciates. At the same time, domestic consumers find that they pay higher prices, so they should be disappointed when the currency becomes weaker. Why do the exporters usually win out, so that governments often seem to welcome depreciations while trying to avoid appreciations? (Hint: Think about the analogy with protective tariffs.)

Answer 1

Answer:

Exporters usually win out when their home currency depreciates because it increases demand for the exported products.

Explanation:

The foreign consumers find that the prices of the imports are now reduced because of the depreciation of the exporting nation's currency.  The impact is reduced cost of importation for the importing consumers.  When prices fall, demand tends to increase relative to supply.  For any government that wants to encourage exports for earning foreign exchange, it will always work hard to avoid currency appreciation so that consumers from the importing nation are not discouraged or made to develop alternatives.