A change in the exchange rate changes the converted price of every traded good, so it changes what importers pay and what exporters receive. To trace the effect, convert a price before and after, then say who is better or worse off.
This builds on telling appreciation from depreciation and belongs to international trade and exchange rates. It is the lesson where calculation turns into evaluation.
How do I trace an effect step by step?
Use the same four links every time:
- Rate change: which currency appreciated or depreciated.
- Price change: convert a real price before and after.
- Behaviour change: buyers may buy more or less, or sellers may earn more or less.
- Who is affected: name the importer, exporter, consumer or firm.
Prices stay the same in the currency they are quoted in. What moves is the number you get when you convert them.
Worked example
Take the fictional pair from the earlier lessons. The rate moves from 1 dora = 5 kesa to 1 dora = 4 kesa. The dora has depreciated and the kesa has appreciated.
A Kesland importer buys a Doravian machine priced at 2,400 dora. Before: 2,400 × 5 = 12,000 kesa. After: 2,400 × 4 = 9,600 kesa. The importer pays 2,400 kesa less, so imports become cheaper for Kesland buyers.
A Kesland exporter sells a box of tea to Doravia for 300 kesa. Before, the Doravian buyer paid 300 ÷ 5 = 60 dora. After, the same box costs 300 ÷ 4 = 75 dora. The tea is 15 dora dearer for the Doravian buyer, so it may sell less.
If the Kesland exporter keeps the price at 60 dora instead, the exporter now receives 60 × 4 = 240 kesa per box, down from 300. Either the price abroad rises or the revenue at home falls.
Doravia’s side: its machine is cheaper abroad (a drop from 12,000 to 9,600 kesa), which helps Doravian exporters. Its importer of Kesland tea pays more, 75 dora instead of 60.
The mistake to watch for
The common slip is a one-sided answer: “depreciation is good because exports get cheaper.”
Mistaken answer: “The dora fell, so Doravia gains.”
The student described only exporters and ignored that Doravian importers now pay 75 dora for the same tea.
The correction is to name the group. Doravian exporters can gain price competitiveness, while Doravian importers and anyone relying on imported inputs face higher costs.
Check yourself
Use the rate change 1 dora = 5 kesa to 1 dora = 4 kesa.
1. A Doravian firm sells toys priced at 80 dora to Kesland. What is the price in kesa before and after?
Show answer
Before: 80 × 5 = 400 kesa. After: 80 × 4 = 320 kesa. The toys are 80 kesa cheaper for Kesland buyers.
2. A Doravian importer buys Kesland fabric priced at 600 kesa. What does it cost in dora before and after?
Show answer
Before: 600 ÷ 5 = 120 dora. After: 600 ÷ 4 = 150 dora. The fabric costs 30 dora more, so Doravian importers lose.
3. In one sentence, who gains from the dora depreciating?
Show answer
Doravian exporters can gain, because their goods cost fewer kesa and become more price competitive abroad. Other answers are fine if they name the group and the link.
Where this leads next
Exchange rates are one thing that affects trade. Governments also use rules, which the next lesson covers in explaining a trade barrier using a model. The percentage-base explorer helps with the before and after changes.
Chains of reasoning are easy to follow when written for you and harder to build under exam time. A teacher on our online one-to-one Economics tuition can practise building them with you from your own answers.