Effects of exchange rate changes on exports and imports

G3 Economics - syllabus K343, 2027

What this lesson teaches

  • I can explain how a change in the exchange rate affects the prices of and demand for exports and imports.

    Syllabus K343, 6.3.4. Consequences of changes in foreign exchange rates: effects of changes in foreign exchange rates on prices and demand for exports and imports

Make a guess

The Singapore dollar appreciates. What happens to the price of a Singapore-made machine for American buyers?

  1. It falls, because a stronger currency means cheaper goods.
  2. It rises, because they need more US dollars to buy it.
  3. It stays the same, because the S$ price is unchanged.
Show the answer

It rises, because they need more US dollars to buy it.

Each S$ costs more US dollars, so the same S$ price becomes dearer in US dollars, and exports may fall.

An appreciation makes exports dearer and imports cheaper; a depreciation makes exports cheaper and imports dearer.

When a currency appreciates, foreigners need more of their own currency to buy the country's exports, so exports become dearer abroad. Demand for exports tends to fall. Imports become cheaper for residents, so demand for imports tends to rise.

When a currency depreciates, exports become cheaper abroad, so demand for them tends to rise. Imports become dearer, so demand for them tends to fall.

These changes matter for firms and jobs. A depreciation can help exporters sell more and hire more workers. An appreciation helps consumers and firms that rely on imported goods, and can lower inflation.

How much demand changes depends on price elasticity of demand. If demand for exports is inelastic, a change in their price changes the quantity sold only a little.

Appreciation
Exports dearer, imports cheaper.
Depreciation
Exports cheaper, imports dearer.
Size of effect
Depends on price elasticity of demand.

Worked example: Working out the price effect

A Singapore-made machine sells for S$10,000. The rate moves from S$1 = US$0.75 to S$1 = US$0.80.

  1. Before: price in the US = 10,000 x 0.75 = US$7,500.
  2. After: price in the US = 10,000 x 0.80 = US$8,000.
  3. The S$ appreciated, so the machine became dearer for American buyers.
  4. American demand for the machine is likely to fall, though by how much depends on PED.

Try it step by step

Problem 1

A Singapore firm sells a machine part for S$200. The exchange rate changes from S$1 = US$0.70 to S$1 = US$0.77.

Show the working
  1. Foreign price before: S$200 x 0.70 = US$140
  2. Foreign price after: S$200 x 0.77 = US$154
  3. Percentage change in the foreign price: (154 - 140) / 140 x 100 = +10%. The appreciation makes the part dearer abroad.

Problem 2

A Singapore bakery sells a cake for S$50 in Johor. The exchange rate changes from S$1 = RM3.20 to S$1 = RM3.36.

Show the working
  1. Foreign price before: S$50 x 3.20 = RM160
  2. Foreign price after: S$50 x 3.36 = RM168
  3. Percentage change in the foreign price: (168 - 160) / 160 x 100 = +5%

Problem 3

A Singapore firm sells a tour for S$300 to Japanese visitors. The exchange rate changes from S$1 = 110 yen to S$1 = 99 yen.

Show the working
  1. Foreign price before: S$300 x 110 = 33,000 yen
  2. Foreign price after: S$300 x 99 = 29,700 yen
  3. Percentage change in the foreign price: (29,700 - 33,000) / 33,000 x 100 = -10%. The depreciation makes the tour cheaper for Japanese buyers.

Watch out for this

A strong currency is always good for a country.

A strong currency helps consumers and importers and can reduce inflation, but it makes exports dearer, which can hurt exporters and jobs.

Check your understanding

A country's currency depreciates. What is the likely effect?

  1. Exports become cheaper abroad and imports become dearer.
  2. Both exports and imports become cheaper for buyers on each side.
  3. Exports become dearer abroad and imports cheaper.
Show the answer

Exports become cheaper abroad and imports become dearer.

Right. Foreigners need less of their currency; residents need more to buy imports.

Check your understanding

The S$ goes from S$1 = US$0.70 to S$1 = US$0.80. An American laptop is priced at US$800. What does it cost a Singapore buyer now?

  1. It rises from S$1,000 to about S$1,143
  2. It stays at S$800, its listed price in the shop
  3. It falls from about S$1,143 to S$1,000
  4. It rises from S$560 to S$640
Show the answer

It falls from about S$1,143 to S$1,000

Right. US$800 / 0.70 is about S$1,143 before, and US$800 / 0.80 = S$1,000 after, so imports get cheaper.

The Wise Otter

Getting your study space ready