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Economics IGCSEPDF 113
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● Fluctuations in PKR exchange rate affect cost of imports (fuel, machinery), export
competitiveness (textiles, agriculture), foreign debt servicing and remittances.
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: flexible to market conditions, but may be volatile.
: more stable exchange rate, but requires large reserves and may not reflect
market fundamentals.
● Changes in interest rates, inflation rates, speculator activity, political and economic
stability, changes in exports/imports.
If domestic currency
: exports become more expensive abroad, imports
become cheaper at home — may worsen trade balance.
If domestic currency
: exports cheaper abroad, imports costlier — may
improve trade balance, but risk inflation.
In a floating system: determined by demand and supply of the currency in foreign
exchange markets.
○ Demand arises from exports, inward investment, speculation.
○ Supply arises from imports, outward investment, exchange controls.
In a fixed system: the rate is set by the government or central bank and maintained via
interventions (buying/selling currency).
Causes of fluctuations
Floating vs fixed exchange rates
Floating
Fixed
Significance for Pakistan context
Effects of exchange rate changes
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appreciates
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depreciates
6.4 Current Account of the Balance of Payments