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Exchange rate fluctuations to affect trade

Exchange rate fluctuations in economies have sizeable effects on import and export volumes—a 10 per cent currency depreciation generally results in a rise in exports of an average 1.5 per cent of GDP—because cheaper currencies make exports more appealing.

There has been a rising trend toward global value chains. Manufacturers have been making more products in multiple places, with different stages in the development cycle done in different economies. This production fragmentation weighs on any gains from currency depreciation because multiple economies and their respective exchange rates are also factored in. In general, increased participation in global value chains could lower the effects of exchange movements on trade prices and of trade prices on trade volumes.

The world’s recent exchange rate movements are expected to result in redistribution of new exports across economies. Among economies experiencing currency depreciation, the rise in exports is likely to be the greatest for those with slack in the domestic economy and with financial systems operating normally.

 
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