Learn about how currency changes can affect imports and exports. Find out how this affects you. Discover what happens when a dollar is strong compared to other currencies and what happens when it is weak.
Imports and Exports
When you hear the terms 'imports' and 'exports,' you may think of some complicated and elaborate business you saw on a television show a few months back. You may simply think these terms sound dull and have little impact on your everyday life. The bottom line is that these two terms have a dramatic impact on the economy and the selection of everyday goods that you are able to purchase.
When you walk into large electronic stores, you expect to see top electronic brands from across the world, not just electronics made in your neighboring states. Can you imagine if you walked into a popular electronics store and they only had two television brand choices? You would probably end up paying more money and might not even like the choices you had to choose from. These products from other countries (imports) provide more choices for you and can also help you save money.
One of the biggest factors that influences imports and exports is the value of currencies between trading countries. Let's explore how the value of currencies can impact businesses and directly affect the amount of goods and services you may have to choose from when you go shopping.
Currency Changes and Imports
Imports are goods that are produced in a foreign country but sold in a home country. When people in one country demand products from firms in another country, they must enter into another market first to buy that nation's currency. Once this currency is exchanged, they can then purchase the product.
For example, if you owned a chain of dollar stores and wanted to purchase various products from large Chinese corporations, you often can't just send a check in American dollars to the companies in China. Chinese companies would want to be paid in their own currency. As a result, you would have to go into a foreign exchange market and buy the Chinese currency with the American dollars so that you could pay for your goods.
When the U.S. dollar is strong compared to many other countries' currencies, imports are less expensive. This is because every American dollar you have will buy more corresponding foreign currency. So when you go to pay the Chinese companies in their own currency, you won't have to spend as many dollars to do it! As a result, this will lead to increased demand for imported products and the currency needed to purchase them.
On the other hand, if you are importing and your local currency depreciates in value or becomes weak, then the products you are importing become more expensive. It now costs you more U.S. dollars to purchase foreign currency, making those products in Japan and China more expensive. A strong dollar or currency leads to higher imports. A weak dollar or currency to lower imports.
Currency Changes and Exports
To review quickly, exports are goods that are produced in a home country but sold to foreign countries. For example, you may have a business that makes and sells your own clothing line in the U.S. In order to increase your sales, you decide to enter and market your clothes to England and Europe. All of the sales and shipments of your clothes to England and Europe are exports.
So how does a strong dollar affect your export business? If you are exporting and your local currency becomes strong or appreciates in value, then your products become more expensive for your buyers in England and Europe. Since you want to be paid in U.S. dollars, they will have to exchange their pounds or Euros for U.S. dollars. When your European business partners can't purchase as many dollars with their money, that makes your products more expensive. As a result, they will likely buy less of your product.
When the value of the dollar depreciates or falls, your European partners can now buy more U.S. dollars with their currency, and the price of your goods seems cheaper to them. This will increase your exports and overall sales!
To recap, a strong dollar decreases exports because U.S. products seem more expensive to foreign consumers. A weak dollar increases exports because U.S. products seem cheaper to foreign consumers.
Let's use another example to drive home the concept. Consider your clothing company struck a deal to sell its top jeans to a firm in Mexico City. You agreed to sell them for $25 U.S. dollars each. Assume the exchange rate is 10 pesos to the U.S. dollar. So, the $25 pair of jeans would cost the Mexican importer 250 pesos ($25 * 10 pesos). Over the next month, let's assume that the dollar appreciates against the Mexican peso to a level of 12 to 1. The $25 pair of jeans now costs the Mexican firm 300 pesos ($25 * 12). This may force the Mexican importer to look for cheaper jeans from other firms or maybe even from clothing companies in other countries.
To summarize, how much you pay for goods, the selection of goods you have to choose from, and the success of your business and standard of living can be directly related to imports, exports, and how the price of currency affects them.
When the U.S. dollar is strong compared to many other countries' currencies, imports are less expensive. This will lead to higher imports. When the dollar depreciates, or is weak, this can lead to lower imports or goods purchased from foreign countries.
On the other hand, a strong dollar decreases exports because U.S. products seem more expensive to foreign consumers. When foreign consumers exchange their currency for U.S. dollars, they simply can't buy as many U.S. dollars. When the dollar weakens, foreign consumers see U.S. products as cheaper, increasing demand for U.S. products and exports.
Now that you have finished this lesson, you should be able to:
- Define imports and exports
- Explain how a strong or weak dollar affects the prices of imports and exports