how does having a flexible exchange rate affect a country's gdp as opposed to having a...

how does having a flexible exchange rate affect a country's gdp as opposed to having a fixed exchange rate?

Expert Solution

Flexible exchange rate means the rate which is set according to the demand - supply market forces.if there will be higher demand then it means higher exchange rate.As flexible exchange rate determined according to the demand supply market forces hence if there will be higher production activity then there will be higher supply of goods.hence it affect GDP .

As we know GDP means gross domestic product in a financial year by the country. If there will be increase in foreign exchange rate then it means that country have economic strength.so if we are doing import from this country then we have to pay more .so strong exchange rate can tends to occur low inflation.

Fixed exchange is having fixed rate which is decided by government or central bank.

as we see GDP = consumption + capital investment + government spending + ( export -import)

Hence higher the value of net export higher the gdp.

Net export have begative relationship with the strength of home currency.

If capital machinery is imported from foreign country then exchange loss might be happen.

Inflation and interest rate is also one of the factor for deciding GDP.

Rahul Sunny answered 8 months ago

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