Before Starting Export Trade Understand Currency Exchange Rates

Currency Exchange Rate is one of the factor that confuses our exporters and importers. Today this blog will make Foreign Currency Exchange Rates clear for Indian Exporters who wish to start their Exporting Trade. This blog also aims to explain how Foreign Currency Exchange Rates affect Export Import Trade. Export Import Courses are for entrepreneurs who are interested in International trade but have zero to minimum knowledge about the same. The Foreign Exchange Rates depends majorly on the consumer’s demands for a particular product or a bunch of trendy goods. Export Import Trade provides the consumers of the world a horizon of choices. And because they are usually manufactured more cheaply than any domestically produced equivalent, imports help consumers manage their strained household budgets. 

Exchange Rate Regime-

1 Fixed Exchange rate- It is a type of exchange rate in which a currency’s value is matched to the value of another single currency or any another measure of value. A currency that uses a fixed exchange rate is known as a fixed currency. 2 Floating Exchange Rate- It is a type of exchange rate in which a currency’s value is allowed to fluctuate according to the foreign exchange market. A currency that uses a floating exchange rate is known as a floating currency. 3 Linked Exchange Rate- It is used to equlise the exchange rate of a currency to another. Let’s now understand some of the terms widely used in Foreign Exchange Rates and then concrete on how Export Import is influenced by the same.

  • Gross Domestic Product:

Gross Domestic Product most commonly known as GDP is a broad measurement of a nation’s overall economic activity. Export and Import are an important component of the Expenditure method of calculation of GDP.  

Here’s how GDP is calculated:

GDP = C + I + G ( X – M ) In this Equation, C = Consumer spending on goods and services I = Investment spending on business capital goods G = Government spending on public goods and services X = Exports M = Imports In the above equation, Export minus Imports (X-M) equals Net Exports. When exports exceed imports, the net exports figure is positive. This indicates that a country has a trade surplus. When exports are less than imports, the net exports figure is negative. This indicates that the nation has a trade deficit.

  • How Export Import affects the Economy of a Nation:

The economic growth of a country depends on Trade Surplus. When there are more exports, it means that there is a high level of output from a country’s factories and industrial facilities. It also means that a greater number of people are being employed in order to keep these factories in operation. When a company is exporting a high level of goods, this also equates to a flow of funds into the country. This stimulates consumer spending and contributes to the economic growth of the exporting nation.

The opposite of this applies to imports. When a country is importing goods, this represents an outflow of funds from that country. Local companies are the importers and they make payments to overseas entities or the exporters. The nation’s economy is used outside of the nation, but it doesn’t always have a negative effect. A high level of imports indicates robust domestic demand and a growing economy. If these imports are mainly productive assets, such as machinery and equipment, this is even more favourable for a country since productive assets will improve the economy’s productivity over the long run. A healthy economy consists of both exports and imports picturing a healthy flow of currency in and out of the nation. This typically indicates economic strength and a sustainable trade surplus or deficit. Let’s understand what happens to the economy of a nation when one of two factors is more than the other. If exports are growing, but imports have declined significantly, it may indicate that foreign economies are in better shape than the domestic economy. Conversely, if exports fall sharply but imports surge, this may indicate that the domestic economy is faring better than overseas markets. It can be concluded that rising levels of imports and a growing trade deficit can have a negative effect on one key economic variable, which is a country’s exchange rate, the level at which their domestic currency is valued versus foreign currencies.

  • Export Import Impacts on the Exchange Rates:

The relationship between a nation’s imports and exports and its exchange rate is complicated because there is a constant feedback loop between international trade and the way a country’s currency is valued. The exchange rate has an effect on the trade surplus or deficit, which in turn affects the exchange rate, and so on. It means, a weaker domestic currency stimulates exports and makes imports more expensive. Conversely, a strong domestic currency hampers exports and makes imports cheaper.

For example, consider an electronic component priced at $10 in the U.S. that will be exported to India. Assume the exchange rate is 50 rupees to the U.S. dollar. Neglecting shipping and other transaction costs such as importing duties, for now, the $10 electronic component would cost the Indian importer 500 rupees. If the dollar were to strengthen against the Indian rupee to a level of 55 rupees (to one U.S. dollar), and assuming that the U.S. exporter does not increase the price of the component, its price would increase to 550 rupees ($10 x 55) for the Indian importer. This may force the Indian importer to look for cheaper components from other locations. The 10% appreciation in the dollar versus the rupee has thus diminished the U.S. exporter’s competitiveness in the Indian market. At the same time, assuming again an exchange rate of 50 rupees to one U.S. dollar, consider a garment exporter in India whose primary market is in the U.S. A shirt that the exporter sells for $10 in the U.S. market would result in them receiving 500 rupees when the export proceeds are received (neglecting shipping and other costs). If the rupee weakens to 55 rupees to one U.S. dollar, the exporter can now sell the shirt for $9.09 to receive the same amount of rupees (500). The 10% depreciation in the rupee versus the dollar has therefore improved the Indian exporter’s competitiveness in the U.S. market. This is how Export Import affects Foreign Currency Exchange Rates. Every nation’s economy is affected by its imports and exports to a greater or a lesser extent. Hope you like this blog and find it helpful for understanding currency exchange rate. For more such information join export import course.   Do find the time to visit us!  

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