Exchange Rate: Significant Role In International Economy
Exchange rate plays a significant role in international economic relations in open economy. The changes in the exchange rate have many different effects on macroeconomic variables such as interest rate, inflation rate, unemployment, money supply, output etc. Due to these facts every nation opens its doors to international trade in goods and services for economic well-being. Model of exchange rate on balance of payment (Oladipupo, A. and Onotaniyohuwo, F. 2011) exchange rate links the price systems of two different countries through international trade to make direct comparison of traded goods; it links domestic prices with international prices. Through its effects on the volume of imports and exports, exchange rate exerts a powerful influence on a country’s balance of payments position. And it has an impact on output through production of tradable and non-tradable goods.
Current account is one of the important variable in the balance
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It will increase competitiveness of firms and increase the production of domestic products and output. However, some researchers focusing on developing countries showed that the adverse effect of devaluation on output (see Krugman & Taylor, 1978, Acar (2000), and Seid, 2010,). The effect of currency devaluation on the economic growth of Ethiopian economy is not clear; that is the effect of devaluation on GDP per capita has a time varying effect; negative effect on the same year and positive effect on one year lagged (Tirsit, 2011). And Yilkal W. (2012) on the contrary of IMF’s argument devaluation have contractionary effect in the Ethiopian economy. Even though, an ambiguous results from empirical studies devaluation of currency has been used as a growth strategy by many developing
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