Q.If the exchange rate of the home currency rises, the value of exports of the economy is likely to ________ . (Fill in the blank with correct answer)

The key idea is the impact of exchange rate appreciation on export competitiveness.

When the exchange rate of the home currency rises, it means the home currency appreciates. This makes home country goods more expensive for foreign buyers, as they need to exchange more of their currency to purchase the same amount of the home currency. Consequently, the demand for the economy's exports is likely to …

The question asks about the impact of a rising home currency exchange rate on the value of exports. To understand this, we first need to clarify what "exchange rate of the home currency rises" means and then trace its effects on international trade.

In economics, when the "exchange rate of the home currency rises," it means the home currency has appreciated. This implies that one unit of the home currency can now buy more units of foreign currency, or, conversely, one unit of foreign currency buys fewer units of the home currency. This change in relative value directly impacts the prices of goods traded internationally.

Let's break down the process:

1. Understanding "Exchange Rate of the Home Currency Rises"

   • An exchange rate expresses the value of one currency in terms of another. For example, if the exchange rate is $1 \text{ USD} = 80 \text{ INR}$, it means 1 US Dollar can be exchanged for 80 Indian Rupees.
   • When the "exchange rate of the home currency rises," it means the home currency appreciates. This implies that the home currency becomes stronger relative to foreign currencies.
   • Consider India as the home country. If the exchange rate of the Indian Rupee (INR) rises, it means the INR can now buy more foreign currency. For instance, if the rate changes from $1 \text{ USD} = 80 \text{ INR}$ to $1 \text{ USD} = 75 \text{ INR}$, this signifies an appreciation of the INR. Why? Because now you need fewer Rupees to buy one Dollar, meaning each Rupee is worth more Dollars than before ($1 \text{ INR} = 1/80 \text{ USD}$ initially, now $1 \text{ INR} = 1/75 \text{ USD}$).

2. Impact on the Price of Exports for Foreign Buyers

   • Exports are goods and services produced domestically and sold to foreign countries. These goods are typically priced in the home currency by the domestic producers.
   • When the home currency appreciates, foreign buyers need to spend more of their own currency to acquire the same amount of the home currency.
   • Let's use our example: An Indian exporter sells a product for $8,000 \text{ INR}$.
     • Initially, at $1 \text{ USD} = 80 \text{ INR}$, a US buyer would pay $8,000 \text{ INR} / 80 \text{ INR/USD} = 100 \text{ USD}$.
     • After the INR appreciates to $1 \text{ USD} = 75 \text{ INR}$, the same product still costs $8,000 \text{ INR}$ to the Indian producer. However, the US buyer now has to pay $8,000 \text{ INR} / 75 \text{ INR/USD} \approx 106.67 \text{ USD}$.
   • This shows that the price of Indian exports, when converted into foreign currency, has increased for foreign buyers. …