Here is a graphic from the Wall Street Journal. It shows a strong correlation between the exchange rate and the revenue from selling exports. Remember the following:
Effects of a declining €
• Imports: Should in theory discourage imports. However if goods are inelastic(necessities) the end result is a much higher import bill.
• Exports: Should lead to an increase in the value of exports sold. But it takes time for exporting firms to adjust their marketing and production schedules to take maximum advantage of falling currency values.
• Inflation: Because of dearer imports this may lead to an increase in domestic inflation.
Effects of a rising €
• Imports: Eurozone imports become cheaper. Will improve the B of P provided demand is inelastic. If demand is elastic, cheaper imports will lead to an increase in the volume of imports and a worsening of B of P position.
• Exports: Eurozone exports become dearer. If demand is inelastic export earnings increase and B of P position improves. If demand is elastic their will be a fall in sales and a consequent worsening of the B of P position.
• Inflation: Eurozone imports are cheaper therefore this helps to reduce inflationary pressures.