Exchange rates affect international trade and investment from "summary" of Economics of Money, Banking and Financial Markets, Business School by Frederic S. Mishkin
Exchange rates play a crucial role in determining the levels of international trade and investment. When a country's currency appreciates, its goods and services become more expensive for foreign buyers. This can lead to a decrease in exports as foreign customers seek cheaper alternatives. On the other hand, a depreciation of a country's currency makes its exports more competitive in the global market, leading to an increase in export levels. Similarly, exchange rates also impact international investment decisions. A stronger currency makes foreign investments more attractive as investors can purchase more assets in the foreign country for the same amount of their domestic currency. Conversely, a weaker currency may deter foreign investors as their returns may be eroded when repatriated back to their home country. The relationship between exchange rates, international trade, and investment is not one-dimensional. Fluctuations in exchange rates can create uncertainty and risk for businesses engaging in international transactions. This uncertainty can lead to a decrease in trade and investment as businesses may delay or cancel their plans until the exchange rate stabilizes. Moreover, exchange rate movements can also impact the profitability of multinational corporations. Companies with operations in multiple countries are exposed to exchange rate risk as fluctuations in currencies can affect their revenues and costs. To mitigate this risk, multinational corporations may engage in hedging activities to protect their profits from adverse exchange rate movements.- Exchange rates play a significant role in shaping the patterns of international trade and investment. Businesses, investors, and policymakers closely monitor exchange rate movements to anticipate their impact on the global economy. Understanding the dynamics of exchange rates is essential for making informed decisions in the increasingly interconnected world of international finance and commerce.
