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

Which of the following is the most likely direct effect on Indian exporters of a sustained depreciation of the rupee against the US dollar, other things being equal?

Indian exporters' price competitiveness in dollar terms improves. A weaker rupee lets them lower dollar prices or earn more rupees per dollar sold, while imported inputs cost more in rupees. The trade balance does not improve instantly because quantities adjust slowly, as the J-curve suggests.

  1. ATheir dollar-priced goods become more expensive for US buyers
  2. BTheir rupee earnings on each dollar of sales fall
  3. CTheir imported input costs in rupees fall
  4. DTheir price competitiveness in dollar terms improvesCorrect
  5. The balance of trade necessarily moves into surplus immediately

Explanation

A weaker rupee means each dollar converts into more rupees, so exporters can cut dollar prices or earn higher margins, improving competitiveness. The claim that dollar prices rise abroad is wrong because the foreign price falls relative to before. Imported inputs become costlier in rupees, not cheaper, and the trade balance reaction is gradual because of the J-curve.

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