- Impact on Trade Balances:
- Devaluation/depreciation makes exports cheaper.
- This can increase exports and improve trade balance.
- It also makes imports costlier, potentially reducing them.
- Appreciation makes exports more expensive and imports cheaper.
- This can worsen trade balances.
- Impact on Inflation:
- Depreciation can lead to inflation.
- Imported goods become more expensive, increasing costs.
- This can contribute to cost-push inflation.
- Appreciation can help reduce inflation by making imports cheaper.