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IAI Actuarial Core Principles · Business Economics · Impact of the macroeconomic environment on business

An Indian exporter of software services invoices clients in US dollars and incurs most costs in rupees. If the rupee depreciates against the dollar, other things equal, what is the most likely effect on the exporter?

The exporter benefits because each dollar earned converts into more rupees while rupee costs remain broadly unchanged, so margins improve. It could also cut dollar prices to compete harder abroad. Costs do not automatically rise by the same proportion.

  1. ARupee revenue rises per dollar invoiced, improving rupee margins, and the firm can also price more competitively abroadCorrect
  2. BRupee revenue falls per dollar invoiced, reducing margins
  3. CRupee costs rise automatically by the same proportion as revenue
  4. DThere is no effect, because invoices are in dollars
  5. The exporter's dollar prices must rise to remain profitable

Explanation

Depreciation means each dollar converts into more rupees, so rupee revenue rises while rupee costs stay broadly unchanged, lifting margins. The exporter also has scope to cut dollar prices if it wants more volume. Rupee costs do not automatically rise in step.

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