Question

Give an example of how a change in the exchange rate alters the relative price of domestic goods in terms of foreign goods

Answer 1

Answer - Let us suppose the exchange rate of India and US is 1US $ = ₹ 70 . Now if the value of dollar depreciates and becomes 1 US $ = ₹65 , the price of goods in India will rise , i.e price of domestic goods with respect to foreign goods will rise in India . This will lead to greater import and lesser export

If this value depreciates and 1US $ = ₹ 75 , then Indian goods will be cheaper now and the price of the domestic goods will fall in relation to the foreign goods. This will lead to more export and lesser import