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Trade Unions: Pros and Cons
Negative impacts of currency appreciation
International Trade and Exchange Rates
Frequently asked question
Use precise and accurate language to convey your points.
The appreciation of a country's domestic currency can have both positive and negative effects on its economy. This analysis examines the potential negative impacts of currency appreciation.
➡️1. Higher Export Prices: When the domestic currency appreciates, the prices of exports denominated in the domestic currency become relatively more expensive for foreign buyers. This can lead to a decrease in demand for exports as they become less competitive in international markets. Lower export demand can result in reduced export revenue and potentially lead to a decrease in production, employment, and overall economic growth.
➡️2. Lower Import Prices: An appreciation of the domestic currency makes imports relatively cheaper. While this may benefit consumers by increasing the affordability of imported goods, it can also have negative consequences for domestic industries. Cheaper imports can lead to increased import competition, posing challenges for domestic producers who may struggle to compete with lower-priced foreign goods. This can result in a decrease in domestic production, job losses, and potential economic downturn in affected sectors.
➡️3. Impact on Current Account: Currency appreciation can negatively impact the current account balance. As export prices increase and import prices decrease, the trade balance may worsen, leading to a decrease in the current account surplus or an increase in the current account deficit. A persistent current account deficit can indicate an imbalance in the country's external trade and may have long-term consequences on the economy, such as increased reliance on external financing and potential vulnerability to economic shocks.
➡️4. Economic Growth Implications: A significant appreciation of the domestic currency can hamper economic growth. Reduced export revenue and import competition can lead to decreased investment and lower overall demand in the economy. This can result in slower economic growth or even a contraction in economic activity.
It is important to note that the impact of currency appreciation on the economy is influenced by several factors, including the openness of the economy, the structure of industries, the flexibility of exchange rates, and the responsiveness of exports and imports to price changes. Additionally, government policies, such as monetary and fiscal measures, can influence the overall effect of currency appreciation on the economy.
In conclusion, while currency appreciation may have some positive effects, such as increased affordability of imports and potential foreign investment, it also carries negative implications for exports, domestic industries, the current account balance, and overall economic growth. The overall impact depends on the specific circumstances of the country and the extent of currency appreciation.
- Definition of currency appreciation
- Importance of understanding the impact of currency appreciation on the economy
II. Negative impact of currency appreciation
- Price of exports will be higher, leading to a decrease in export revenue
- Price of imports will be lower, leading to an increase in import spending
- Decrease in demand for domestic products, leading to a decrease in demand for labor
- Decrease in current account surplus/increase in current account deficit
- Lower economic growth
III. Why currency appreciation will not have a negative impact
- Price of imports will be cheaper, leading to an increase in affordability of imports and an increase in standards of living
- Price of imported raw materials/machinery will be lower, leading to a lower cost of production and a lower final price
- PED for exports and imports might be inelastic
- May encourage foreign investment as there may be increased confidence in the country's future economic prospects
IV. Case study: Japan's currency appreciation in the ➡️1➡️9➡️80s
- Explanation of Japan's currency appreciation
- Negative impact on Japan's economy
- Positive impact on Japan's economy
- Summary of the impact of currency appreciation on the economy
- Importance of considering both the negative and positive impacts of currency appreciation when analyzing its impact on the economy.
• Price of exports will be higher – decrease export revenue.
• Price of imports will be lower – increase import spending.
• Decrease demand for domestic products – decrease demand for labour.
• Decrease current account surplus / increase current account deficit.
• Lower economic growth. Why appreciation will not have a negative impact:
• Price of imports cheaper – increase affordability of imports – increase standards of living.
• Price of imported raw materials / machinery lower – lower cost of production – lower final price.
• PED for exports and imports might be inelastic.
• May encourage foreign investment as there may be increased confidence in the country’s future economic prospects