Question

explain the impact of rise in exchange rate on national income

Answer 1

When we are trying to understand the relationship between foreign exchange rate and national income, then we will have to see the amount of exports and imports done by a country.

If the exchange rate of a country falls with respect to other country then its exports become cheap while imports become expensive. 

For example: If exchange rate was US$1= INR 60, and if the exchange rate decreased to US$1=INR 70, then businesses that are selling their products in the US will receive more money. So, if my product was priced at US$5, I was receiving 5*60=INR 300, now the exchange rate depreciated to 70, so for the same priced product in the US that is priced at US$5, I will be receiving 5*70=INR 350. Similarly, for imports, as the exchange rate depreciated to INR 70 and if I want to purchase a smartphone worth US$200; earlier I was paying 200*60=INR 12,000. Now I will paying, 200*70=INR 14,000.

Exactly opposite will happen when exchange rate will appreciate. for example: when US$1= INR 60 will become US$1= INR 50.

hope it helps you :-)

thank you.

Answer 2

devaluation could cause higher economic growth. Part of AD is (X-M) therefore higher exports and lower imports should increase AD (assuming demand is relatively elastic). In normal circumstances, higher AD is likely to cause higher real GDP and inflation.