How exchange rates affect the economy
Currencies are valued differently across nations due to factors that include local production and bargaining power. We will look at how these diverse exchange rates affect the economy.
Exchange rates overview
Exchange rates are rates that currency is valued against another. While most countries fixed their exchange rates, it is more complicated than arbitrary currency fixing. A company economy needs to be able to back its monetary value with goods and services production. This is why countries with good local production like China, the USA, the UK, Germany, and Japan have good exchange rates compared to other developing countries. Countries, like Venezuela and Zimbabwe who have little or nothing to bargain with, have very poor exchange rates. Some countries like kuwait have a high exchange rate but don't match with its local production, this is what is known as 'facial exchange'.
Effects of exchange rates on the economy
While many people may not directly feel the effects of exchange rates, indirectly exchange rates affect everyone. Let's look at some factors that make the exchange rate affect the economy.
Inflation and interest rates
A weak denomination means a poor exchange rate. This will affect the economy of nations and steer them towards inflation like most nations are going through now. For citizens with poor exchange rates, they will buy foreign products at huge prices compared to local goods. A good example is due to Bolivia's inferior exchange rate, a citizen will use Chevrolet at two times the amount a US citizen will buy it.
Encourages money laundering
When a country's exchange rate is weak, individuals with enough wealth will not save in the country but launder their money to foreign accounts of stable economies. This is visible among Africa and South American politicians, who steal money, but keep it in foreign accounts, thereby weaken their countries' economy. The bottom line is that every nation should try to improve its currency to mitigate the dire effects on the economy.