Economics · International trade and globalisation. The idea in plain words, the rules to remember, the mistake to avoid and a worked example, written and checked by Mega Lecture.
A foreign exchange rate is the price of one currency in terms of another. With a floating exchange rate, that price is set by the demand for and supply of the currency.
Foreigners demand rupees to buy Pakistan's exports, to invest or save in Pakistan, and to speculate; workers' remittances sent home add to demand too. Rupees are supplied when people in Pakistan buy imports, invest abroad or send profits and interest abroad.
A rise in the value of a currency is an appreciation; a fall is a depreciation. A depreciation makes exports cheaper for foreigners and imports dearer at home. An appreciation does the opposite.
When the rate moves from $1 = Rs 250 to $1 = Rs 280, the number is bigger but the rupee is weaker: more rupees are needed for each dollar, so the rupee has depreciated.
Answer: The dollar price rises from $300 to $350, so the export becomes less competitive.
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