Question

Explain the effect of depreciation of domestic currency on exports.

Answer 1

With the depreciation of the domestic currency, the demand for the exports (by the native country) rises. This is because depreciation of domestic currency results in the fall in the price of the domestic currency in terms of foreign currency. This makes the exports cheaper and dearer and thereby their foreign demand increases.

In the above case, Indian Rupee has depreciated in terms of USD from Rs 45 to Rs 50. Consequent of this fall in the Indian Rupee, the demand for Indian exports will rise, as it is more cheaper for the Americans to buys the same goods at lower price of Rs 50. Thus, as they can buy more of goods using the same 1$ (as before), so this would raise the demand for Indian exports.