ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -When a country’s exchange rate increases relative to another country’s, the price of its goods and services increases. Imports become cheaper. Ultimately, this can decrease that country’s exports and increase imports.

Detailed explanation-2: -Currency appreciation, or increase in value compared to other currencies, and depreciation, or a fall in its value, can affect the trade deficit. The trade deficit might worsen if the local currency appreciates because imports become cheaper and exports become less profitable, causing the domestic demand to fall.

Detailed explanation-3: -If a currency appreciates it is more valuable; if a currency depreciates it is less valuable. When an exchange rate changes, the value of one currency will go up while the value of the other currency will go down. When the value of a currency increases, it is said to have appreciated.

Detailed explanation-4: -The fundamental cause of a trade deficit is an imbalance between a country’s savings and investment rates. As Harvard’s Martin Feldstein explains, the reason for the deficit can be boiled down to the United States as a whole spending more money than it makes, which results in a current account deficit.

Detailed explanation-5: -A higher trade deficit leads to jobs being outsourced to foreign countries as more imports lead to fewer job opportunities. Demand for imported goods leads to a decline in demand for locally made goods, which leads to the closing of factories and the associated job losses.