Question

Consider the appreciation of a currency. What effects might this have on international companies exporting overseas? What actions could companies take to minimize these effects?

please do it on word instead of notebook or image and mention references. it should be of approximately 500 words

thank you

Answer 1

Dear Student,

Below are the answer to your question

Abstract

Currency depreciation is an opposite of currency appreciation, it is a fall in the value of a currency in a floating exchange rate system. Currency depreciation can occur due to any number of reasons – economic fundamentals, interest rate differentials, political instability, risk aversion among investors and so on

Currency appreciation effects on international companies exporting overseas

When a currency appreciates, it means it increased in value relative to another currency; depreciates means it weakened or fell in value relative to another currency. When a dollar buys more than its equivalent in another currency, it's often labeled strong.

For Example,Let's assume one US dollar equals 600 Chilean pesos, and a pound of local apples costs 1 dollar. Chilean apples cost 600 Chilean pesos (also one dollar). If the dollar appreciates and buys 700 pesos, imported apples will now cost 0.85 dollars (the same 600 pesos). In Chile, American apples will cost 700 pesos instead of 600.

Currency appreciation tends to make imports cheaper because the same amount of local currency can buy more foreign products. Local consumers might find better prices on imported goods, so imports tend to increase. Appreciation might also cause domestic production to lose competitiveness in the international market because local products are now worth more in foreign currency. Therefore, exports tend to decrease. More imports and fewer exports expand the trade deficit.

Currency appreciation, or increase in value compared to other currencies, and depreciation, or a fall in its value, can affect the trade deficit. The trade deficit might worsen if the local currency appreciates because imports become cheaper and exports become less profitable, causing the domestic demand to fall.

Measures to Counteract the Effects

The actions to counteract the effects of currency appreciation usually focus on stabilizing the exchange rate and protecting local producers. To prevent further appreciation, governments might increase national reserves in foreign currency. By buying foreign currency, they increase its demand and prevent further appreciation. To prevent imports from replacing local production, governments sometimes increase taxes on certain imported goods, so local consumers remain likely to buy local products. Some countries also offer subsidies to local producers, helping them to remain competitive and cope with lower local prices and less profitable exports.

If you like the answer, Kindly subscribe and up vote

Thank You !!