Question

Debate why exchange rates are of critical importance to firms in the automobile industry.

Answer 1

Automobile firms use many components which are imported. If domestic currency appreciates, domestic cost of imported goods falls, so import cost decreases and production cost falls, leading to higher profitability. In contrast, if domestic currency depreciates, domestic cost of imported goods rises, so import cost increases and production cost rises, leading to lower profitability.

Therefore, too much fluctuation of exchange rates will affect profitability of the firms.