Practicing Success
Which of the following shows effect of depreciation of domestic currency on foreign trade? |
Encourages exports Encourages imports Discourages imports Both 1 and 3 |
Both 1 and 3 |
Depreciation of domestic currency make exports cheaper for the foreign country residents, due to which the exports of domestic country increases. Goods which were available at 1 dollar for the foreign residents are now available at 1/2 dollar only because the domestic currency had depreciated ( earlier 1 dollar = Rs70, now 1 dollar = Rs140). Similarly, the imports become expensive for the domestic country, which results in decrease of imports. Earlier we had to pay Rs70 for importing a product worth 1 dollar, now that will increase to Rs140 due to depreciation of domestic currency. |