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An exchange rate is the rate at which one country's currency can be traded for another

country's currency. When a currency appreciates it means it increased in value relative to


another currency; depreciates means it weakened or fell in value relative to another currency.
Usually the exchange rates are determined by the demand and supply of that currency in the
international market.
Demand for any countrys currency on the foreign exchange market is determined by demand
for that countrys exports of goods and services and by changes in foreign investment in that
country. This is because when foreigners buy another countrys exports of goods or services
they must pay for these in the currency of the exporting country.
In the same way Supply of any countrys currency on the foreign exchange market is
determined by that countrys imports of goods and services and by its investment in other
countries.
Thus when the demand for a currency rises its price goes up and it becomes costlier.
A fixed exchange rate system refers to the case where the exchange rate is set and maintained
at same level by the government irrespective of the market forces.
Floating exchange rate system means that the exchange rate is allowed to fluctuate according
to the market forces without the intervention of the Central bank or the government.
Although the effects can take time, changes in the exchange rate can have a big impact on the
economy and our own standard of living and purchasing power! There is often debate over
whether a country should have a high or low exchange rate. These discussions often revolve
around the current economic and political goals at the time. Let's explore the effects of changes
in the exchange rate of Bangladesh Currency (Taka) and see how economic variables, such as
export, import, remittance, foreign direct investments and portfolio investments and domestic
production are affected.

We can analysis the impact of appreciation and depreciation of Bangladesh currency (Taka) on
four basic factors of the countries economy.

1.International Trade(Export and Import)


2.Remittence
3.Foreign Direct Investments & portfolio Investments and
4. Domestic Production
International Trade (Export and Import)
Depreciation effect
From theory we can see when a currency depreciates or weakens in relation to other currencies,
exports get cheaper. So exports should go up. But in Bangladesh things are quite different.
Bangladesh use to import raw materials then export goods by adding some value with the
imported raw materials. So if taka depreciates the import of raw materials would be more costly
so the value addition will be lower and price will go up. So foreigners will have to buy
Bangladeshi product at a higher rate thus export will become much lower in Bangladesh .As our
major sector is RMG. There is little amount of value addition in that sector. But in those sectors
like medicine and other where the value addition is higher there would certainly the impact of
taka depreciation will e positive.
Now in the import part theory says that if taka value depreciates the impact would be negative.
But in our country the Bangladeshi people have extreme fascination about foreign goods .the
price of goods in not a factors while making purchasing decision of foreign goods so imports of
consumer goods will not be hampered in the short run. Again goods like petroleum is a must
import for Bangladesh economy .So there also will be no negative impact in the short run. But
in the long run we can face high rate of inflation, high import bills etc. as the price of imported
goods will gradually rise.
Appreciation effect
If we consider the bookish effect we can conclude that the Export should go down .But the
reality is if the taka value appreciates then the backward linkage in the exporting industries of
Bangladesh gets cheaper. Because we can buy more raw materials at lower price. But in those
industries where the rate of value addition is 100% the impact of appreciation of taka is
definitely negative.
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When the exchange rate for a Taka strengthens it makes imports cheaper. This means you and
I spend less money on foreign goods. This in turn puts pressure on foreign firms to keep their
prices low, so they can remain competitive. All of this leads to lower prices and ultimately more
money in our pocket and a higher standard of living. As the price will go up so the demand for
foreign goods will go up. So the inflation will be reduced if taka value appreciates. The impact
on import will be definitely positive.
.
Let
Lets use an example to illustrate this concept
concept
Consider an electronic component priced at $10 in the U.S. that will be exported to Bangladesh.
Assume the exchange rate is 50 Taka to the U.S. dollar. Ignoring shipping and other transaction
costs such as import duties for the moment, the $10 item would cost the Bangladeshi importer
500 Taka. Now, if the dollar strengthens against the Bangladeshi Taka to a level of 55,
assuming that the U.S. exporter leaves the $10 price for the component unchanged, its price
would increase to 550 Taka ($10 x 55) for the Bangladeshi importer. This may force the
Bangladeshi importer to look for cheaper components from other locations. The 10%
appreciation in the dollar versus the Taka has thus diminished the U.S. exporters
competitiveness in the Bangladeshi market. At the same time, consider a garment exporter in
Bangladesh whose primary market is the U.S. A shirt that the exporter sells for $10 in the U.S.
market would fetch her 500 Taka when the export proceeds are received (again ignoring
shipping and other costs), assuming an exchange rate of 50 Taka to the dollar. But if the Taka
weakens to 55 versus the dollar, to receive the same amount of Taka (500), the exporter can
now sell the shirt for $9.09. The 10% depreciation in the Taka versus the dollar has therefore
improved the Bangladeshi exporters competitiveness in the U.S. market.
To summarize, a 10% appreciation of the dollar versus the Taka has rendered U.S. exports of
electronic components uncompetitive, but has made imported Bangladeshi shirts cheaper for
U.S. consumers. The flip side of the coin is that a 10% depreciation of the Taka has improved
the competitiveness of Bangladeshi garment exports, but has made imports of electronic
components more expensive for Bangladeshi buyers. Multiply the above simplistic scenario by
millions of transactions, and we may get an idea of the extent to which currency moves can
affect imports and exports.

Remittance
Theory says that depreciation of taka will be better. So the Bangladeshi worker working in
foreign countries would invest more in Bangladesh. So the impact would be positive. But the
real scenario is this in Bangladesh the remittance is used only for consuming purpose not in
investments purpose. So whether the currency appreciates or depreciates the amount of
remittance would not be effected.
FDI and portfolio investments
The appreciation and depreciation in taka value does not affect the FDI and other Portfolio
investment in the short run. But if the situation continues in the long run we might see some
impact of appreciation expectation and depreciation expectation while taking decision by the
investors.
Domestic Production
To maximize profits and production, countries should specialize in the production and export of
commodities that it can produce at a lower opportunity cost than other countries, which is
called comparative advantage. This includes importing commodities produced at a lower
opportunity cost in other countries, which would increase overall GDP for all countries involved.
In Bangladesh if taka value depreciates than the cost of importing foreign goods will be higher
so the price of the export will also increase .Thus there would be a negative impact on export.
On the other hand if the taka values appreciates we can easily predict thee would be a very
dangerous impact on local production .As there is a culture of buying foreign goods rather than
domestic goods so the local production will go down. There will be less investments in local
industries, there will be less job opportunities, high unemployment, high inflation etc. the ripple
effect of taka value appreciation will be very dangerous for Bangladesh Economy. So, there is
nothing absolute goodness in appreciation of domestic currency(Taka) though sometimes it
may help us to consume more or favor us like my borrowing case. But, for a developing
economy which mainly depends on its emerging export to the foreign market it is pretty tough
to continue economic growth with such an appreciation of domestic currency. Appreciations
actually destroy our local market and its production growth.