Dear All: It says that if a currency falls in value the demand for exports in the currency should increase. At an exchange rate of 1.5 USD/EUR, something at 100 euros costs a U.S. customer $150. But if the USD/EUR rate is now 1.3, it only costs the US customer $130. They say this will increase demand for euros from U.S.-based customers for this reason. But why? Either way, I’m paying less. Why do I care if I pay 1)1 lesser-valued euro under the 1.3 exchange rate for the item (as opposed to a higher-valued euro under the 1.5 exchange rate), or 2) $130 under the lower exchange rate, instead of $150? Aren’t they they same? Why would this increase the value of the Euro relative to the Dollar? -Richard
The US consumer benefits like you say since the price drops $20. But to buy it, you first need to convert dollars into Euros, which means you are increasing the demand for Euros to buy the good. Say you’re on Ebay buying some wine directly from Europe. It sells for the same prices you outlined above. You save $20 with the currency change, but sell your dollars to buy Euros, and exchange your Euros to by the wine. Since you buy the Euros, you increase the demand for Euros.
So a item that was costing a US-customer $150 (due to Fx of 1.5 U/E), is now costing him $130 (due to new Fx of 1.3 U/E). So if he wanted to maintain his expenditure/purchasing power of $150, he can get items worth of 150/1.3 = Euro115.38. Means - same money of $150 was able to buy goods worth of Euro 100 initially, but now buys good worth of Euro 115.38. [USD appreciated and Euro Depreciated] Thus the US customers demands of Euro goods will increase, causing a surplus of USD’s in the Fx market and a shortfall of Euros in the market. Driving the price of USD’s to sink and price ot Euro to rise
Thanks guys. I appreciate it! -Richard
This might help you as well: Exporters BENEFIT from a DECLINING domestic currency (domestic goods are cheaper to foreigners, thus increased global demand) Exporters are HURT by an APPRECIATING domestic currency (domestic goods are more expensive to foreigners, thus decreased global demand) Importers BENEFIT from a APPRECIATING domestics currency (foreign foods are cheaper) Importers are HURT by a DECLINING domestic currency (foreign goods are more expensive)