A fall in the exchange rate is known as a depreciation in the exchange rate (or devaluation in a fixed exchange rate system). It means the currency is worth less compared to other countries.
- When there is a depreciation, and the exchange rate goes down,
- Exports will be cheaper
- Imports will become more expensive
- e.g. a depreciation of the dollar makes US exports more competitive but raises the cost of importing goods into the US.
- Therefore there will be an increase in exports and decrease in the quantity of imports.
- Domestic firms will benefit from increased sales. This may lead to job creation and lower unemployment, especially in export industries.
- The increase in (X-M will) help increase Aggregate Demand (AD) and therefore lead to higher economic growth