5. What Happens to Domestic Industries When Currency Depreciates?
Currency depreciation means that a country's money is worth less compared to other countries' money. This can have many effects on local businesses, especially when they trade with other countries. Here are some key ways that currency depreciation impacts domestic industries.
When a currency depreciates, it gets cheaper for people in other countries to buy products and services from that country. This can result in:
More Exports: Companies that sell goods to other countries may notice more people wanting to buy them because their prices are lower. For example, after the Brexit vote in 2016, the British pound became less valuable. This caused UK exports to increase by 7% by 2017, according to the Office for National Statistics.
More Money for Exporters: As more foreign buyers come in because of lower prices, exporters can make more money. For instance, because the pound dropped 20% in value from 2016 to 2017, UK exports reached £636 billion in 2019, which was more than in earlier years.
On the other hand, currency depreciation makes imported goods and services more expensive. This leads to:
Costlier Imports: Local businesses that need to buy materials or parts from other countries will have to pay more. If the currency falls by 10%, the costs of imports will likely go up by about the same amount. For example, British manufacturers faced higher prices in 2018 as the pound fell, raising their manufacturing costs by around 3%.
Rising Prices Overall: This increase in import costs can add to inflation, which is when the overall level of prices rises. The Bank of England said that after Brexit, inflation increased to 3% in 2017, mainly due to the higher prices of imports.
A weaker currency may push local businesses to change how they produce goods:
More Local Production: With higher costs for imports and a greater need for exports, many businesses might decide to produce more in their own country. For example, the drop in the pound led several UK companies to boost their local manufacturing, which created more jobs.
Investment in Growth: Businesses may choose to invest more in production to meet the growing demand for exports. The Institute for Supply Chain Management found that many UK companies expected to increase their investments in 2017 because of good opportunities for exporting.
Currency depreciation can also help the tourism industry:
While there are some positives, businesses can also face problems because of currency depreciation:
Rising Prices for Consumers: When businesses deal with higher import costs, they may need to raise their prices. This can hurt the economy because people might buy less.
Lower Profits: Companies that import a lot of materials could see their profits drop if they can't raise prices for their customers.
In conclusion, currency depreciation affects domestic industries in different ways. It can make exports easier and attract more tourists, but it can also lead to higher costs for imports and inflation. After Brexit, while the drop in the pound helped increase export amounts, it also created challenges that companies had to manage. Understanding these effects is important to see how changes in currency values impact an economy.
5. What Happens to Domestic Industries When Currency Depreciates?
Currency depreciation means that a country's money is worth less compared to other countries' money. This can have many effects on local businesses, especially when they trade with other countries. Here are some key ways that currency depreciation impacts domestic industries.
When a currency depreciates, it gets cheaper for people in other countries to buy products and services from that country. This can result in:
More Exports: Companies that sell goods to other countries may notice more people wanting to buy them because their prices are lower. For example, after the Brexit vote in 2016, the British pound became less valuable. This caused UK exports to increase by 7% by 2017, according to the Office for National Statistics.
More Money for Exporters: As more foreign buyers come in because of lower prices, exporters can make more money. For instance, because the pound dropped 20% in value from 2016 to 2017, UK exports reached £636 billion in 2019, which was more than in earlier years.
On the other hand, currency depreciation makes imported goods and services more expensive. This leads to:
Costlier Imports: Local businesses that need to buy materials or parts from other countries will have to pay more. If the currency falls by 10%, the costs of imports will likely go up by about the same amount. For example, British manufacturers faced higher prices in 2018 as the pound fell, raising their manufacturing costs by around 3%.
Rising Prices Overall: This increase in import costs can add to inflation, which is when the overall level of prices rises. The Bank of England said that after Brexit, inflation increased to 3% in 2017, mainly due to the higher prices of imports.
A weaker currency may push local businesses to change how they produce goods:
More Local Production: With higher costs for imports and a greater need for exports, many businesses might decide to produce more in their own country. For example, the drop in the pound led several UK companies to boost their local manufacturing, which created more jobs.
Investment in Growth: Businesses may choose to invest more in production to meet the growing demand for exports. The Institute for Supply Chain Management found that many UK companies expected to increase their investments in 2017 because of good opportunities for exporting.
Currency depreciation can also help the tourism industry:
While there are some positives, businesses can also face problems because of currency depreciation:
Rising Prices for Consumers: When businesses deal with higher import costs, they may need to raise their prices. This can hurt the economy because people might buy less.
Lower Profits: Companies that import a lot of materials could see their profits drop if they can't raise prices for their customers.
In conclusion, currency depreciation affects domestic industries in different ways. It can make exports easier and attract more tourists, but it can also lead to higher costs for imports and inflation. After Brexit, while the drop in the pound helped increase export amounts, it also created challenges that companies had to manage. Understanding these effects is important to see how changes in currency values impact an economy.