What Is the Connection between Exchange Rates and Economic Growth?

When business commerce occurs in a country, consumers generally pay based on the value of the currency in the nation where transactions are made. The exchange rate determines the worth of one region's currency in relation to another nation's paper and coin money. These values change frequently, and can be discovered on the foreign exchange market. It is not uncommon for an advance in a country's exchange rate to occur alongside economic expansion. Growth in a regional economy typically means that there is higher production across manufacturing and other business sectors.

There does not appear to be an absolute synchronization between exchange rates and economic growth. Nonetheless, even slightly higher output, or productivity, across industry in a nation is likely to lead to a strong financial position. Greater production can be an indication of robust demand stemming from overseas for goods and services that are made in a region.

The value of a nation's currency generally increases with greater demand, which may be measured by international trade. This includes the pace at which items made domestically are exported overseas. An economy can be stimulated by strong demand originating from other countries. Greater trade activity can lead to stronger productivity, which tends to help exchange rates and economic growth.

When interest begins to wane, however, the worth of the money tends to decline. There may be a decrease in both exchange rates and economic growth in a country when weakness surrounds a currency. A feeble currency, as indicated in the exchange rate, may also ignite greater cross-border shopping activity, however. Residents in a country with a solid currency could attempt to take advantage of cheaper prices overseas, for instance. In this situation, tourists may be taking advantage of weaker exchange rates and economic growth occurring internationally.

Economic growth might unfold even if the exchange rate for a country's money does not similarly increase alongside the expansion, which may indicate strong productivity in certain sectors of that nation's economy that may be indigenous to that country. As a result, production output may not be reflected in an improved exchange rate. For instance, the increase in production could be in sectors that benefit the local economy but that do not necessarily trigger more demand for international trade. In this case, there may be little evidence of both rising exchange rates and economic growth. Instead, even while domestic output may rise, the benefits might be confined locally.