How do exchange rates affect international trade?

Exchange rates play a crucial role in international trade by directly affecting the prices of imports and exports. When the value of a country's currency appreciates relative to other currencies, its goods and services become more expensive for foreign buyers, potentially reducing export levels. Conversely, if a currency depreciates, exports can become cheaper and more attractive to international buyers, possibly increasing sales abroad.

Similarly, exchange rates influence the cost of imports. If a country's currency weakens, imported goods become more expensive for local consumers and businesses, which may lead to decreased demand for those imports. On the other hand, if the currency strengthens, imports can become cheaper, increasing their demand.

By altering the prices at which goods and services are traded internationally, exchange rates effectively determine how competitive a country's products are on the global market, thereby impacting trade balances and economic health. This relationship highlights the significance of understanding exchange rates for businesses engaged in international commerce.