6.4.4—Exchange rate changes

A depreciation raises the domestic-currency price of imports and lowers the foreign-currency price of exports, subject to the quotation convention. An appreciation generally reverses these effects.

The short-run trade balance may worsen if contracts and quantities are slow to respond—the J-curve pattern. Later, export and import elasticities determine whether the value of trade improves. Imported input costs can also create cost-push inflation.

After a depreciation, an airline buying fuel in dollars faces higher domestic costs even if its passenger prices are unchanged. Exporters may gain competitiveness, but the net trade effect depends on demand responses.

Currency depreciation is not a free competitiveness gain: imported inflation and foreign-currency debt can offset benefits.