Question

How does rapid economic growth at home affect foreign exchange markets?

Answer 1

Rapid economic growth is characterised by increase in GDP. Gross Domestic Product (GDP) is the measure of all the final goods and services produced within the home country. An increase in GDP shows that the citizens of a country are doing well. Their purchasing power increases. Due to the increase in purchasing power, the demand of goods in the country increase. This will lead to rise in the prices i.e inflation. If the domestic prices increase, the demand for domestic goods by the foriegn countries will decrease. No one will want to buy expensive goods of the home country. This will lead to fall in exports. The home currency will depriciate, i.e value of the currency will become less as compared to the foreign country.

Thus, rapid economic growth at home will affect the foreign exchange markets by increasing the value of foreign currency and decreasing the value of home currency.