E3S Web of Conferences 214, 03007 (2020) https://doi.org/10.

1051/e3sconf/202021403007
EBLDM 2020

The Influence and Impact of the Exchange Rate on the Economy

Yuxin Zhao
Faculty of Business, University of Nottingham Ningbo, Xi‘an, Shannxi, 710068, China

Abstract—This paper analyzes the influence and impact on the exchange rate from several aspects. Firstly,
the primary factors influenced by the exchange rate, export, the prices and costs are introduced in this paper.
Productivity refers to the increase because the local currency strengthens. Then, it indicates that the
exchange rate affects productivity. The last part about influential factors is the effect on the number of
tourists. After analyzing the impact of the exchange rate, some suggestions about exchange rate policies are
put forward. The exchange rate is an essential element, and it requires to attach importance to both the
logical operation and the appropriate use of policy.

depreciates, the amount of export will increase.

1 Introduction According to Thorbecke and Kato (2011), some
countries import products from Japan and reprocess the
The exchange rate refers to a currency against another product to export again to other countries [6]. As long as
currency in the foreign exchange market. Specifically, it the currency of reprocessing country goes up, the
is used to verify the price of one currency expressed by amount of export can be restricted. So as for import
other currencies. Fluctuations of exchange rate have a countries which import from Japan, the appreciation of
direct regulating effect on import and export trade local currency give rise to a decrease in export. Some
between countries. Exchange rate subjects to changes in argued that this outcome could be different in the export
interest rates, inflation, national politics, and the situation in Japan. The unique export product that is used
economy of each country. The foreign exchange market to be reprocessed again and the decrease in reprocessing
determines the exchange rate. It can be affected by the and export affects the quantity of export in Japan.
attitude to market expectations. An excellent market Thorbecke and Kato (2011) proved that the consumption
expectation is a prospect of local currency going up. In export would decrease by approximately 30% on
this case, the local currency will be bought in a large account of the 30% appreciation of Japanese yen [6].
quantity, and the local currency will strengthen. This data proved that the exchange rate plays an
Moreover, macroeconomic policy has a more significant essential role in Japanese export as well. Additionally,
impact on the exchange rate. For example, when a the price is commonly regarded as independent variables.
country implements a tight fiscal policy, its currency However, from the standpoint of the exchange rate, the
external exchange rate will strengthen. Apart from these price could be dependent variables. It is said by Mathias
factors impacted on the exchange rate, the exchange rate (2015) that the augment of price and difficulty of
can give rise to a series of effects on various core decisions for vendors, distributors, and sellers are
elements. The elements such as consumption, export, affected by the exchange rate[3]. For instance, the value
price, productivity, and the number of foreign tourists of dollars was going up, which attributed to an
will be shown below. Hence, there are different atmosphere of component cost increased, and the market
exchange rate policies, floating exchange rate policy, price increased in the eurozone [3]. Besides, in the UK,
fixed exchange rate policy, as well as pegged exchange the phenomenon of steadily increasing costs also
rate. This paper will analyze the influence and impact on appeared. With the increase in cost and component
the exchange rate at first. Then suggestions about how to prices, the maintenance and update more and more
make proper decisions on the exchange rate policy will expensive. In this circumstance, an enormous number of
be provided with. industries would face a harmful effect, and it would be
detrimental to the enthusiasm and anticipation of the
economy.
2 The impact of exchange rate on
export price
Export is the most dominant element that will be
affected because of the exchange rate. If the local
currency per US dollar increases and the local currency

© The Authors, published by EDP Sciences. This is an open access article distributed under the terms of the Creative Commons Attribution
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E3S Web of Conferences 214, 03007 (2020) https://doi.org/10.1051/e3sconf/202021403007
EBLDM 2020

3 The impact of exchange rate on proved by Jeanneney and Hua (2010) that thanks to the
consumption appreciation of RMB, the productivity in China
increased sharply. A virtuous circle was found in China,
It is suggested that the exchange rate also has some the appreciation fostered productivity, and
influence on consumption. Although the depreciation of simultaneously the productivity promoted the real
local currency brings less competitivity to a country and exchange rate [2]. Besides, there are differences in
expand the export, it has some influence on consumption. economic status between each city in China, and the
The income of workers with high Marginal Propensity to incremental productivity could assist in reducing the gap.
Consumption (MPC) is redistributed to the producer In addition, high productivity plays a role in
with low MPC on account of inflationary effects of compensating the loss of international competency.
depreciation, which theoretically leads to a decline of
consumption [4]. Supposed that a specific local currency
appreciates, the ability to purchase foreign commodities
5 The impact of exchange rate on the
strengthen. In this case, foreign commodities became number of foreign tourists
economical to consume and invest, which means that the
The volatility of the exchange rate is a crucial issue in
amount of foreign consumption could increase. As the
the emerging tourism market. As a matter of fact, the
consumption of foreign goods increases, domestic
incremental exchange rate positively affects the number
consumption is likely to decrease. Oskooee, Kutan, and
of foreign tourists and conduces to facilitate the tourism
Xi (2015) used 12 samples to measure the exchange rate
market. Tung (2019) investigated the relationship
in the consumption function[4]. The outcome of the
between the exchange rate and the tourism market from
report shows that the exchange rate affected domestic
2006-2018, and figure 1 shows the number of tourists to
consumption in the nine samples. The cases of Hungary,
Vietnam during this period. The data was assembled
the Czech Republic, Bolivia, and Malaysia showed that
monthly, and it described that the increase of the
currency depreciation lowers consumption [4]. Therefore,
exchange rate raised the number of tourists [7]. Research
the volatility of the exchange rate affects domestic
in Vietnam is a useful recommendation for other
consumption, and it possibly impacts the development of
emerging markets. Tourism markets could empirically
the economy.
respond to the change in exchange rate. Granger tested
the causal relationship between the exchange rate and the
4 The impact of exchange rate on number of foreign tourists, which concluded a onefold
productivity relationship from the exchange rate to the number of
tourists [7]. Thus, the exchange rate could be a reference
Except for the factors mentioned before, productivity is to the tourism market policymakers, and policymakers
possibly influenced by the exchange rate. Although could efficiently respond to the influence on tourism
productivity and the exchange rate seem to be unrelated, economy. But it is undeniable that improving the
productivity is likely to increase attributes to the environment of resorts and providing satiation to tourists
appreciation of the local currency. It is precisely be are also significant.

Figure 1. The annual number of tourists to Vietnam[7].

factors shown before. Therefore, each country should

operate rationally to reduce the negative influence of the
6 Suggestions exchange rate and the risky high proportion of damaging
The exchange rate is an influential element in the the economy. Both reasonable and legal operations
economic system that can affect a series of relevant between each country are essential to maintenance and
improve the economy and relationships among nations.

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E3S Web of Conferences 214, 03007 (2020) https://doi.org/10.1051/e3sconf/202021403007
EBLDM 2020

Countries are supposed to choose their exchange rate import-export oriented economies can benefit from the
systems and policies that are suitable to ensure the fixed exchange rate policy, because the stable exchange
appropriate exchange rate, and conducive to economic rate reduces the risk of change. Import and export can
development. Fixed exchange rate, floating exchange contribute to a high ratio of GDP in a country, so the
rate, and the crawling pegged exchange rate are the three fixed exchange rate provides protection and security for
major exchange rate systems. The recommendations will GDP.
be illustrated in the following paragraph. Besides, a soft peg is the name of the policy that
The floating exchange rate is a policy that permits allows the market to decide the exchange rate, and when
the foreign exchange market to determine the exchange the exchange rate is either increasing or decreasing, the
rate without the intervention of the government. central bank will intervene in the market. Another
Countries that choose the floating exchange rate policy similar policy named hard peg attempts to keep a fixed
face a fluctuating exchange rate in the short run. A high exchange rate without fluctuations in the short run. The
proportion of countries in the world choose floating intervention of the central bank is permitted in both the
exchange rates such as the United States. The floating soft peg and hard peg. With the help of government
exchange rate helps to stem the tide of massive currency intervention, the economy could be protected from
speculation because the constant change of the exchange getting into recession that is occurred by the crisis or
rate makes less allowance to the speculator to benefit. malignant one side change in the exchange rate.
Moreover, the floating exchange rate is beneficial to a According to Exchange-rate policies (unknown), soft
country to adjust the balance of payment by depreciating peg policy holds the moderate cost of foreign exchange
the local currency to prevent the favorable balance of reserve and adjusts in the long run to reduce the risk of
payment from the balance of payment deficit. Sebastian stuck. Nonetheless, if a country pegs the exchange rate,
(2007) said that a flexible and changeable exchange rate the power of utilizing monetary policy will be given up,
could reduce the probability of going through a capital and maybe it will cause a higher fluctuation in the
flow contraction[5]. The more capital flows, the more foreign exchange market. Furthermore, when a country
beneficial the elastic exchange rate is. However, the which pegs the exchange rate faces recession or inflation,
floating exchange rate brings more foreign exchange and the monetary policy can either be utilized to alter the
rates to international trade and financial activities. It exchange rate or cope with the inflation and recession[1].
weakens the monetary discipline under the fixed Adopting the expansionary monetary policy and reduce
exchange rate system. It encourages the inflationary interest rate attributes to a demand reduction and
tendency of monetary policy so that governments do not increase of supply. After that, a depreciation of the
have to meet their obligations to maintain fixed exchange rate appears and obey the hard peg. In this
exchange rates by suppressing inflation. circumstance, a utilization trade-off between monetary
The fixed exchange rate is another choice, and the policy and exchange rate needs to consider deliberately.
government sets a specific exchange rate. Countries with The table 2 trade off the exchange rate policies.

Figure 2. Table of exchange rate policies[1].

There is no specific regulation to choose exchange targets, a steady increase of economy, low inflation, low
rate policies to reduce the negative influence of the unemployment, and sustainable trade of balance, which
exchange rate. It is suggested by Exchange-rate policies can get more and more prosperous in arbitrary exchange
(unknown) that countries accomplish the four economic rate policy[1]. An exchange rate policy is not a medical

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E3S Web of Conferences 214, 03007 (2020) https://doi.org/10.1051/e3sconf/202021403007
EBLDM 2020

cure to rescue the countries without the four economic 4. Oskooee M. B., Kutan A. M. and Xi D. (2015)
targets. Formulating a precious and comprehensive ‘Does exchange rate volatility hurt domestic
exchange rate policy is essential. Moreover, a correct consumption? Evidence from emerging economics.’,
understanding of countries' operation system and Science Direct 144, pp. 53-65.
capability is also significant for deciding a rational and 5. Sebastian E. (2007) ‘Capital Controls, Capital Flow
appropriate exchange rate policy. There is not a verified Contractions and Macroeconomics Vulnerability.’,
best exchange rate policy, but the best policy is the most ProQuest, Available at: https://search-proquest-
suitable one for the local economic climate. com.ezproxy.nottingham.edu.cn/docview/16886693
59?rfr_id=info%3Axri%2Fsid%3Aprimo (Accessed
7 Conclusion at: 27 February 2019)
6. Thorbecke W. and Kato A. (2011) ‘The effect of
The influence and impact of the exchange rate are exchange rate changes on Japanese consumption
extensive, and the analysis should be comprehensive. export.’, Science Direct 24(1), pp. 64-71.
This essay firstly analyzes the core factors that 7. Tung L. T. (2019) ‘Does exchange rate affect
influenced by the exchange rate, and it finds that the foreign tourist arrivals? Evidence in an emerging
impact on export is the most direct and remarkable. With tourist market.’, Management Science Letters 9(8),
the change in the exchange rate, the price and cost are pp. 1141-1152, doi: 10.5267/j.msl.2019.5.001
affected in the foreign exchange market, and the
productivity is influenced, respectively. The last factor
mentioned in the essay is the number of foreign tourists,
which shows that the increase in the exchange rate raises
the number of tourists. After that, this essay offers four
core exchange rate policies with pros and cons to
choosing in diverse situations. The floating exchange
rate is the most widely used choice in the world.
Moreover, the central bank has the responsibility to
intervene to manipulate both the soft peg and hard peg. It
is illustrated that there is no definitely the best policy to
choose from. The best outcome of utilizing exchange
rate policy is the most appropriate policy for a high
qualified implemented country. To sum up, the foreign
exchange market is tightly related to the exchange rate,
so the logical operation of each country and well-used
policy could give rise to a prosperous market atmosphere.

Acknowledgment
First and foremost, I would like to show my deepest
gratitude to my teachers and professors in my university,
who have provided me with valuable guidance in every
stage of the writing of this thesis. Further, I would like to
thank all my friends and roommates for their
encouragement and support. Without all their
enlightening instruction and impressive kindness, I could
not have completed my thesis.

References
1. Exchange-rate policies (unknown) Available at:
https://courses.lumenlearning.com/wm-
macroeconomics/chapter/exchange-rate-policies/
(Accessed at: 23 February 2019)
2. Jeanneney S. G. and Hua P. (2010) ‘How does real
exchange rate influence labour productivity in
China?’, Science Direct 22(4), pp. 628-645.
3. Mathias K. (2015) ‘The exchange rate effect.’,
ProQuest, Available at: https://search-proquest-
com.ezproxy.nottingham.edu.cn/docview/16842990
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