Exchange Rate Implications On International Trade

There is least a discussion of international trade and investment or broadcast of business news without the mention of exchange rate between the currencies of nations. It is indeed not inconceivable that it forms part of the nucleus of international business. Like inflation and interest rates, exchange rate is one of the most watched, monitored and analyzed economic indicators across the globe. It is used by policy makers, governments, think tanks, and international organizations to gauge the heartbeat of an economy. Exchange rate is the price of a currency in relation to another currency. It is the rate at which one currency is exchanged for another currency.

The state of the exchange rate has economic implications to international trade and business.

Depreciation of a currency
When there is a depreciation of a local currency relative to another, the country’s exports become cheaper for foreign traders, and thus improve the export competiveness of that nation. If there is a depreciation in the value of the Ghana Cedis against the dollar as we noticed in the first quarter of 2017, it will make Ghana exports cheaper, and its imports rather more expensive. For instance, in March 15, 2016, the exchange rate for US Dollar was US$1 - GHS 3.8424 (Direct quotation, GHS1 – US$ 0.2603) and by March 15, 2017, the exchange rate for US Dollar was US$1 - GHS 4.5739(Direct quotation, GHS1 – US$ 0.2186).

Depreciation of Ghana Cedis against the US Dollar

(Source: Bank of Ghana)
Economic Impact on Exporters
Assuming an R/Lg Laptop produced in Ghana was costing GHS2, 000 in Ghana.

In March 15, 2016, it would be sold in a foreign market at US$ 520.60 (2000*0.2603)

In March 15, 2017, it would traded in a foreign market at US$437.20 (2000*0.2186)

This means that the Ghana Cedis had depreciated in value by 16%. With the same unit of dollar, foreign consumers will now find the local laptop relatively cheaper and increase demand for the Ghanaian Laptop.

Impact on profit margins or price
With a downtick in the value of the local currency, exporters have the latitude to fix price at US$520.60 in 2017 and earn a greater profit margin.

Exporters in Ghana can alternatively down foreign price of the laptop from US$520.60 in 2016 to US$437.20, sell more in 2017 and reap an appreciable profit margin.

Economic Impact on Importers
However, firms in the business of importing of raw materials and goods will rather be confronted with high cost of imports due to the adverse movement in the local currency against its foreign counterpart. Importers will now require additional local currency to purchase the same worth of imports.

Suppose the computer accessories for a single RLg laptop costs US$150 to import. It means that, in March 15, 2016, this would cost GHS576.30 and GHS686.20 in March 15, 2017.

Ghana, for instance, is a net importing nation and anytime there is sharp depreciation in its currency, the nation suffers more than its benefits from international trade.

Appreciation of a local currency
Simply put, appreciation of a currency makes imports of goods and services cheaper while exports will rather become expensive. The appreciation in a currency value will trigger low foreign demand for our local goods and services and hence a disincentive to profit margins.

Strength of the Impact of Exchange rate movements

It is worth mentioning that the impact of exchange rate fluctuation on international trade depends but not limited to:

• The elasticity of demand and Time lag. If the price is elastic especially in the long run, the greater the percentage in demand and vice versa. In short run, the demand for exports is inelastic and would ignite a less proportionate effect

• State of Economy- If the economy is experiencing inflation, depreciation of a local currency will trigger higher foreign demand and make inflation worse off. However, if the economy is in a state of depression, a fall in exchange rate of the local currency will boost aggregate demand and up economic growth with marginal impact on inflation.

• State of other economies- If the global economy is facing challenges like depression and weaker economic growth, a sharp depreciation in exchange rate wouldn’t warrant an equal response in demand for its exports. For instance, global demand for commodities have been relatively low due to weak economies including China

The year 2017 posses an intriguing year for most forecasters of exchange rate on the global scene as they struggle to home in on, a best fit analysis due to the political dynamics of Trump, uncertainty of Brexit and the Eurozone elections.