How Does Appreciation Effect The Growth of A Country?

Effects of Appreciation on the economy

• Exports more expensive. The foreign price of exports will increase. The higher price will lead to a fall in the quantity exported.
• Imports are cheaper. Consumers will find that they can now buy greater quantity of imported goods.
• Lower (X-M). The lower export demand and greater spending on import, we would expect a fall in aggregate demand causing a lower economic growth.
• Lower inflation. This would lead to import prices becoming cheaper. The cost of raw materials and imported goods will fall after an appreciation. Example – imported oil will decrease leading to cheaper petrol prices.
• Lower AD will lead to lower demand-pull inflation. With export prices more expensive, manufacturers have a greater incentive to cut costs and try and remain competitive.
• Impact of appreciation on the current account – An appreciation will tend to reduce inflation, which can make goods more competitive leading to stronger exports in the long run. Therefore, this will improve the current account.
• The impact of the current account depends on the elasticity of the demand. If demand for imports and exports is inelastic, then the current account will improve as exports are more expensive but if the demand is inelastic, there will only be a small fall in demand. The value of exports will increase.
• If demand for exports is price elastic there will be a proportionately greater fall in export demand and therefore the value for exports will fall.
• Often in the short run, demand is inelastic but over time people become more price sensitive and demand more elastic. Some goods with less competition will be inelastic.

Is Appreciation good or bad?

• An appreciation can help improve living standards – it enables consumers to buy cheaper imports.
• If appreciation is a result of improved competitiveness then the appreciation is sustainable and it shouldn’t cause lower growth.
• An appreciation could be a problem if currency appreciates rapidly during difficult economic circumstances.