The change in the exchange rate will change the relative price of imports and exports. For instance, if the exchange rate was to appreciate (increase in value) then the price of exports would increase compared to their previous position, so causing a contraction in demand. In contrast, the price of imports would appear to be relatively cheaper, this would cause an extension in demand. The overall effect would be that the trade balance (exports minus imports) would deteriorate.

• Appreciation of the exchange rate > deterioration in the trade balance
• Depreciation of the exchange rate > improvement in the trade balance

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