The Appreciation Of An Exchange Rate – Economics Essay
The appreciation of a exchange rate can send mixed feelings and mixed signals. It is important you read those signals adequately. An appreciating exchange rate has numerous affects in the economy. Its appreciating
sends ripples through the economy. The exchange affects the amount of a commodity we buy .It also has an impact on what type of commodity we buy. Yet purchases are not the only thing affected. The selling of our commodities and merchandise is affected as much if not more.
When our exchange rate appreciates it means that our dollar is appreciating. This has its ups and downs. Often nations will fix their exchange to get what they think is the biggest advantage. Fortunately Australia has a free exchange rate which means that it is not controlled.
The appreciation of our dollar affects things such as the following.
• Imports are less expensive
• Exports drop due to their price
• CAD will rise because of more demand of imports
• Foreign investment will fall due to contraction in export and domestic competing markets.
When our exchange rate appreciates it will cause our exports to fall. The reason for this is because our dollar is now stronger which means our international buyers find it dearer to buy from us. They have to pay us in Australian dollar but because our dollar is stronger it is too expensive for them to buy from us.
One of the winners in the appreciating of our exchange rate is imports. As our dollar appreciates and gets stronger it will mean that our buying power will increase on the international market. The way it works, take for example of a buyer from Australia buying coffee from Argentina. Previously he could buy two bags for a dollar now that our dollar is stronger we can buy more of their currencies which means he can now buy three bags of coffee.
Now you might think this is a good thing but there are always two sides to every tale. Now that our dollar is stronger the domestic market can purchase imports comparatively cheaper than before. This means an increase in things like luxury items. This is where the problems start. The moment the private sector start buying imported goods and luxury items it increases our international debt and our CAD. This is not the only problem say for example both Australia and Japan both make shoes. Now that our dollar is stronger it means that it is cheaper for us to buy the shoes made in Japan rather than the local shoes. This causes a couple of problems. Firstly it means that our money and incomes are flowing out of the country and secondly because we are know buying shoes from overseas our local industries suffer which then creates unemployment.
Another industry and sector of the public that will find the appreciation of the exchange rate good is the people that travel overseas. The reason for this is that if the dollar appreciates they will lose less or might not lose anything when converting their currencies. Things that they buy overseas will also be cheaper for them than previously.
One of the main groups that will prosper form the appreciation of the dollar is the debtors. Companies that have huge foreign debt will prosper while the dollar is strong. The reason for this is that if the dollar gets stronger we can payback more of the debt because we can buy more of the local currency than before the appreciation.
Yet one thing that is sure to hurt Australia if the exchange rate appreciates is the decline in overseas tourists. If our dollar gets to strong it will be very expensive for tourists to come and visit our nation. The cost of it would deter many tourists. The main problem for them would be when they have to convert their currency into ours they would lose a sufficient amount. This is hard to imagine yet countries in Europe experienced this problem when they joined the Euro because it became very expensive for tourists.