The Impact ofThe Impact ofForeign Exchange RatesForeign Exchange Rates

By Paul D. Mixon

Exchange Rates Impact TradeExchange Rates Impact Trade

• When exchange rates change, the balance of trade can fluctuate.

• If the value of your currency goes up, then goods from other nations will be cheaper.

ExampleExample

For instance, let’s say $1= 10 pesos. If a shirt cost 100 pesos, then you could buy it for $10. If the dollar increased in value, let’s say, $1= 20 pesos, then the same shirt would only cost you $5. Also, a shirt that cost $5 in the U.S. would originally cost 50 pesos, but now costs 100 pesos.

ExampleExample

Now let’s say $1= 10 pesos. If a shirt cost 100 pesos, then you could buy it for $10. If the dollar decreased in value, let’s say, $1= 2 pesos, then the same shirt would only cost you $50. Also, a $5 shirt in the U.S. would originally cost 50 pesos, but now costs 20 pesos.

Exchange Rates and Trade

• If the dollar increases in value, then other nation’s goods will be cheaper to us and our goods will be more expensive to them.

• If the dollar decreases in value, then other nation’s goods will be more expensive to us and our goods will be cheaper to them.

Benefits and Losers

• If the dollar increases in value:

- Consumers will get cheaper goods from other countries.

- Businesses will be hurt because other countries will be less likely to buy American products.

Benefits and Losers

• If the dollar decreases in value:

- Consumers will pay more for foreign goods.

- Businesses will sell more to other nations and will hire more workers.

Questions?