The main role of the exchange rate is to allow international regulations related to international trade: an exporter wants to be paid in foreign currency, because they need currency to pay its employees or its suppliers, while the importer does not have a priori that its own currency to pay. Every time there is an international commercial transaction, there will be a foreign exchange transaction. The exchange rate fluctuations will affect the prices of export goods. For example, if a product sold in France and the USA is 100 €, with an exchange rate of $ 1.25 per euro, therefore it will cost $ 125 (100 x 1.25) to U.S. consumers .
A decline in the exchange rate at $ 1.10 per euro will drop the export price at 110 € (100 x 1.10), while a rise in the exchange rate will rise. Conversely, a well made in the USA, sold in France and worth $ 100, cost 80 € (100 / 1.25) to French consumers in the first case and 90.10 € (100 / 1.10) in the second case. Thus, any decline in the exchange rate of the national currency promotes exports and imports disadvantage, and vice versa for an increase in the exchange rate. So there is a possibility for a country to improve its balance of trade (and hence growth) if it gets a drop in the value of its currency. Countries that consistently under-estimate their currencies to facilitate their exports are accused of making monetary protectionism. To prevent this form of protectionism that countries may agree on a system of fixed exchange rates - such as the Bretton Woods (1944-1971) or the European Monetary System (1979-1992). But some economists point out that a flexible exchange system allows you to balance trade. The reasoning is based on the functioning of the foreign exchange market. If a country has a deficit in its current payments,
A decline in the exchange rate at $ 1.10 per euro will drop the export price at 110 € (100 x 1.10), while a rise in the exchange rate will rise. Conversely, a well made in the USA, sold in France and worth $ 100, cost 80 € (100 / 1.25) to French consumers in the first case and 90.10 € (100 / 1.10) in the second case. Thus, any decline in the exchange rate of the national currency promotes exports and imports disadvantage, and vice versa for an increase in the exchange rate. So there is a possibility for a country to improve its balance of trade (and hence growth) if it gets a drop in the value of its currency. Countries that consistently under-estimate their currencies to facilitate their exports are accused of making monetary protectionism. To prevent this form of protectionism that countries may agree on a system of fixed exchange rates - such as the Bretton Woods (1944-1971) or the European Monetary System (1979-1992). But some economists point out that a flexible exchange system allows you to balance trade. The reasoning is based on the functioning of the foreign exchange market. If a country has a deficit in its current payments,
this means that the country lacks foreign currency to pay for purchases with the rest of the world, and must be requested in the foreign exchange market which lowers the value of its currency in relation to other currencies. Accordingly, the exchange rate of the national currency down, which encourages exports and restricts imports, which, ultimately, the foreign trade balance. The mechanism is reversed in case of current account surplus.This idea that fluctuations in the exchange rate alone could balance the trade has been highly criticized, if only because the exchange rate movements do not depend on that of international trade rules, and therefore a deficit may be accompanied by an increase in the rate of change - as in the case of the USA in the 1980s or late 1990s.
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