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We can analysis the impact of appreciation and depreciation of Bangladesh currency (Taka) on
four basic factors of the countries economy.
When the exchange rate for a Taka strengthens it makes imports cheaper. This means you and
I spend less money on foreign goods. This in turn puts pressure on foreign firms to keep their
prices low, so they can remain competitive. All of this leads to lower prices and ultimately more
money in our pocket and a higher standard of living. As the price will go up so the demand for
foreign goods will go up. So the inflation will be reduced if taka value appreciates. The impact
on import will be definitely positive.
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Let
Lets use an example to illustrate this concept
concept
Consider an electronic component priced at $10 in the U.S. that will be exported to Bangladesh.
Assume the exchange rate is 50 Taka to the U.S. dollar. Ignoring shipping and other transaction
costs such as import duties for the moment, the $10 item would cost the Bangladeshi importer
500 Taka. Now, if the dollar strengthens against the Bangladeshi Taka to a level of 55,
assuming that the U.S. exporter leaves the $10 price for the component unchanged, its price
would increase to 550 Taka ($10 x 55) for the Bangladeshi importer. This may force the
Bangladeshi importer to look for cheaper components from other locations. The 10%
appreciation in the dollar versus the Taka has thus diminished the U.S. exporters
competitiveness in the Bangladeshi market. At the same time, consider a garment exporter in
Bangladesh whose primary market is the U.S. A shirt that the exporter sells for $10 in the U.S.
market would fetch her 500 Taka when the export proceeds are received (again ignoring
shipping and other costs), assuming an exchange rate of 50 Taka to the dollar. But if the Taka
weakens to 55 versus the dollar, to receive the same amount of Taka (500), the exporter can
now sell the shirt for $9.09. The 10% depreciation in the Taka versus the dollar has therefore
improved the Bangladeshi exporters competitiveness in the U.S. market.
To summarize, a 10% appreciation of the dollar versus the Taka has rendered U.S. exports of
electronic components uncompetitive, but has made imported Bangladeshi shirts cheaper for
U.S. consumers. The flip side of the coin is that a 10% depreciation of the Taka has improved
the competitiveness of Bangladeshi garment exports, but has made imports of electronic
components more expensive for Bangladeshi buyers. Multiply the above simplistic scenario by
millions of transactions, and we may get an idea of the extent to which currency moves can
affect imports and exports.
Remittance
Theory says that depreciation of taka will be better. So the Bangladeshi worker working in
foreign countries would invest more in Bangladesh. So the impact would be positive. But the
real scenario is this in Bangladesh the remittance is used only for consuming purpose not in
investments purpose. So whether the currency appreciates or depreciates the amount of
remittance would not be effected.
FDI and portfolio investments
The appreciation and depreciation in taka value does not affect the FDI and other Portfolio
investment in the short run. But if the situation continues in the long run we might see some
impact of appreciation expectation and depreciation expectation while taking decision by the
investors.
Domestic Production
To maximize profits and production, countries should specialize in the production and export of
commodities that it can produce at a lower opportunity cost than other countries, which is
called comparative advantage. This includes importing commodities produced at a lower
opportunity cost in other countries, which would increase overall GDP for all countries involved.
In Bangladesh if taka value depreciates than the cost of importing foreign goods will be higher
so the price of the export will also increase .Thus there would be a negative impact on export.
On the other hand if the taka values appreciates we can easily predict thee would be a very
dangerous impact on local production .As there is a culture of buying foreign goods rather than
domestic goods so the local production will go down. There will be less investments in local
industries, there will be less job opportunities, high unemployment, high inflation etc. the ripple
effect of taka value appreciation will be very dangerous for Bangladesh Economy. So, there is
nothing absolute goodness in appreciation of domestic currency(Taka) though sometimes it
may help us to consume more or favor us like my borrowing case. But, for a developing
economy which mainly depends on its emerging export to the foreign market it is pretty tough
to continue economic growth with such an appreciation of domestic currency. Appreciations
actually destroy our local market and its production growth.