Question

1. Take the exchange rates of two different nations at two different time intervals and determine the DER and IER with reference to one country.
2. Discuss the impact on import due to changes in the exchange rate upon any one nation.
3. Also discuss the impact on export due to change in the exchange rate upon the same nation.
4. Discuss the strength or weakness of one currency over the period of time with reference to other currency.

Answer 1

We are taking US as the local currency and EURO as the Foriegn Currency and the exchange rates for the period 01/01/2019 to 31/12/2019 in thia pronlem.

Solution

DER(Direct Exchange rate) American term identifies a local currency . Further it represents the number of Local currency units(LCU) to be needed to obtain one Foriegn Currency Unit(FCU)

DER = US(LCU) /1 EURO (FCU)

IER ( Indirect exchange rate ) a term which used to identify the number of units of Foriegn Currency required to obtain one unit of LCU . It is resiprocal to DER and is in the view of Foriegn entity

IER = 1FCU / LCU equalent

On 01/01/2019 exchange rates shows 1.15 $ equal to 1€ then

DER assuming Dollar as LCU = 1.15 / 1 = 1.15

IER = 1 /1.15 = 0 .865

on 31/12/2019 exchange rates noted 1.12 $is equal to 1€

DER = 1.12/1 = 1.12

IER = 1/1.12 = 0.89

For the period Dollar has gained it's strength which means the DER has decreased and Less Amount of Dollar equalent is required to obtain a one unit of EURO.

Decrease in DER denotes strengthening of LCU as it indicates less unit of LCU needed to obtain single unit of FCU.

Impact on imports and exports -

For example if an European manufacture is selling an Automobile worth of 20000 € the dollar equalent value changes due to the impact of excange rate will be

Jan 1 / 2019 value

20000 * 1.15 = $ 230000

But as in the case on Dec 31/ 2019

20000* 1.12 = $ 22400

From this example we are able know that the dollar equalent value of the automobile has decreased with out any change in its FCU price .

Impact of import

This will lead to an increase in demand for the product in US and import will increase . Which is entrily due to the strengthening of us dollar .

Impact on export

Ath the same time an demetic automobile company exports a car worth of 20000$

On Jan 01 /2019 Foreign price

20000*0.865 = 17300 €

On Dec 31 /2019

20000*0.89= 17800 €

We can clearly see the price has increased it will lead to low demand in foreign country and the export of the domestic country will be reduced .

Impact of exachge rates is high geared in imports and exports. strengthening of domestic currency towards the foreign will lead to increase in import as it is cheaper to import goods and warkenkng will lead to higher exports and low imports as it is expensive to import goods .

Strengthening and weakening of currency

When the value of a currency rises with respect to a foregoing currency i which mean less unit of goring currency is needed to obtain one unit of Foriegn currency is known strengthening of domestic currency DER will decree and IER will increase. The domestic currency exchanges for more of others currency then the value of domestic currency appreciates.

In the above example we can see the strengthening of us dollar  

But if more unit of domest currency is needed to obain a one unit of foreign currency then the values of domestic currency has weakendd. Domestic currency is exchanges for Les foreign currency the value of domestic currency had depreciated . The DER will increase and IER will increase .