Question

How does the foreign price effect(or foreign purchases effect) explain increased U.S. exports to the rest of the world?

Answer 1

Answer - The exchange rate lends a big hand in affecting the exports to the rest of the world. When the price of our currency is cheaper and the currency of other countries is expensive than ours , our goods are cheaper for them. As a result , when our currency is cheaper , we export more to the rest of the world. But when our currency appreciates relative to others , our goods and services become expensive for other and demand falls. This leads to the fall in the exports of our country to the rest of the world. Hence foreign price effect plays a great role in deciding the level of exports.