The Effect of a Change in the Exchange rate on Export and Import Prices

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    The Effect of a Change in the Exchange rate on Export and Import Prices

    • A fall in the exchange rate – called a depreciation – will reduce the price of exports in terms of foreign currencies
      • So a foreign country could buy UK exports at a cheaper rate if the UK exchange rate fell.
    • Most firms are likely going to let their export prices fall in line with the exchange rate, so as to keep the same level of demand for a product.
    • If a firm faces ineslastic demand for a product though, they may keep their prices the same, as they will gain more money when they convert the foreign currency back into pounds.
    • A fall in the exchange rate will increase the price of imports in terms of domestic currency.

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