When Income of Country Increases

People spend more and Purchase more goods

Hence, they purchase imported goods also more

This leads to increase in Import

Due to this, demand for foreign currency exceeds

This leads to depreciation of domestic currency


Hence, Demand for foreign currency exceeds as compared to supply curve

Effect of Income on Exchange Rate - Teachoo.JPG

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Effect of Income on Exchange Rate If Income Is low Customer spend less (Low purchasing power) They Purchase less Imported Goods Less Demand for Foreign Exchange Decrease in Rate of Foreign Currency Appreciation of Domestic Currency If Income Is High Customer spend more (More Purchasing Power) They Purchase more Imported Goods More Demand for Foreign Exchange Increase in Rate of Foreign Currency Depreciation of Domestic Currency

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Maninder Singh

CA Maninder Singh is a Chartered Accountant for the past 13 years and a teacher from the past 17 years. He teaches Science, Economics, Accounting and English at Teachoo