How do exchange rates influence international trade?

Exchange rates play a crucial role in international trade by influencing the relative prices of imports and exports. When the value of a currency changes in comparison to another currency, it affects how much goods and services cost in foreign markets.

When a domestic currency appreciates, it becomes more expensive for foreign buyers to purchase that country's exports while making imports cheaper for its residents. As a result, exports might decline due to higher prices on the international market, while imports might increase. Conversely, when a currency depreciates, exports become relatively cheaper, potentially boosting sales abroad, while imports become more expensive, discouraging their use.

This dynamic directly affects trade balances because shifts in import and export prices influence the volume of trade between countries. Understanding that exchange rates impact these prices is key to comprehending their significance in international economics.