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The Fluctuations in Foreign Currency:
While there are many reasons for relative currency values, fluctuations. Some of the common ones are identified. It depends upon various factors that which currency rate is beneficial for the country. Interestingly, if the currency’s relative value is low, it does mean that that country is poor or undeveloped. Take the example of South Korea!
1: Printing Money:
It is one of the most known causes of currency devaluation. The reasoning behind this is the basic principle of Economics. That is supply and demand. For instance, when there are two products in a hypothetical market and the total available cash is Rs.1000. Hence, each product will cause Rs 500/- each. Now if govt. prints more money and total cash increases to Rs1500, now each commodity will cost Rs750.
2: Balance of Trade:
Every country trades some goods and services with other countries. So, if the balance of trade is positive, that is inflow of money is more than the outflow, the value of the currency increases and vice versa is also true.
3: Relative Demand for Goods in Foreign Countries:
This is an interesting phenomenon. If one country produces good quality products which have more demand across the world, its price increases. People are willing to pay more. Hence, it gets more foreign exchange. Here the concepts of absolute and comparative advantage come to play. The example above is of absolute advantage.
Comparative advantage simply means one country is more efficient in producing a certain product or service but the quality remains the same. It is also known as economies of scale in which fixed price per unit goes down when production goes up.