Effect of exchange rate and currency fluctuation on economic growth

Economic growth is largely influenced by too many factors but one of the chief factors is the currency exchange rate fluctuation. Currency exchange rate has a way of improving or worsening a nation's standard of living which is a direct outcome of low or high rates of international merchandise.

                          

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In  Nigeria for instance, we have seen how life becomes even more expensive ever since the exchange rate started increasing helplessly as against the Naira. The prices of goods and services are on the rise coupled with inflation that gives little value to a huge sum of money. 

 

Currency fluctuation rate is determined by floating exchange rate. Floating exchange rate is a situation where a nation’s currency price is determined by the Forex market based on the demand and supply mechanism. A long term fluctuation rate of a nation’s currency affects economic strength negatively just like the situation is here in Nigeria at the time of writing this article.

 

What direct effect does this have on the economy

Trade surplus or deficit :- With high exchange rate, a country’s local currency can suffer a trade deficit and if it is low, there could be a trade surplus. Technically, this means that you have to pay a higher amount of money to get just a few goods on importation and vice versa. In the long run, the prices of those imported goods automatically get either more expensive or less. 

 

Secondly, the currency exchange rate impacts economic growth to a very large extent including capital flows, inflation and interest rates. The result in turn becomes visible in the standard of living in the economy. In a situation where a country imports more than half of what it consumes and has maintained a weak currency, the effect will become even more pronounced than necessary.

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