Question

Critically evaluate how exchange rates effect business's in Australia?

Answer 1

Exchange rate is the value of one nation's currency for another nation's currency.Change in exchange rate affects the Australian economy in 2 ways:-

* Direct effect of the exchange rate causes change in price of goods produced in Australia with the goods produced overseas. When their is decline in value of Australian dollars the foreigners has to spend less and this led Australian produced goods cheaper.

Indirect effect of the change in prices of produced goods affect inflation and economic activities.

lets examine it by supposing the condition where australian dollar has depreciated:-

-Effect on economic activity and labour market:- Due to depreciated value of dollar goods produced gets cheaper as compared to ovearseas goods which resulting in higher demand of australian goods from foreign countries. It led to increase in the volume of export.

Due to this price change , australian consumer shifts their demand of imported goods to exported goods.Now increase in export volume and decrease in import volume causes higher national income which led to increase in demand of non tradable goods and services. To meet these increased demands worker to be hired and increase employement.

-Interest rate and Inflation:- Depreciation increases inflation because of increase in imported goods and du to increase in aggregate demand in employement and goods input prices rise which led to higher inflation. To overcome higher inflation Reserve Bank has to increase interest rates.