Question

In July 2018 Yi Gang, Governor of the People’s Bank of China, said the fluctuations in the foreign exchange market were mainly due to factors like stronger U.S. dollar and external uncertainties. How can fluctuations in currency exchange rate affect your country’s economy?

Short answer

The fluctuations in currency exchange rate decides the trade deficit and trade surplus of the economy.

Step-by-step solution

Step 1. Introduction

Exchange rate is the rate at which various currencies are exchanged for one another. The exchange rate is the true representative of the value of currency in the international market.

Step 2. Explanation

Currency exchange rate fluctuations have an impact on the economy because a weaker currency makes imports more expensive, while a stronger currency stimulates exports by making them cheaper for overseas buyers to buy. Over time, a weak or strong currency can contribute to a country's trade deficit or surplus.