Question

How do fluctuations to the international exchange rate of a nation's currency affect its balances of trade?

Answer 1

Answer: Influences the price of exports and imports

Explanation:

The value of the exchange rate of a nation's currency can impact how much the country imports or exports which will affect its balance of trade.

For instance, if a country's currency becomes stronger, it would make its exports more expensive (as these are quoted in the domestic currency) which would lead to less of its exports being sold. At the same time however, imports will become cheaper to the people of this country since their currency is stronger. They will therefore import more.

The net effect is that exports decrease and imports increase thereby making the balance of trade worse off. This situation is reversed when the currency becomes weaker.