Exchange rates and their role in the economy

An independent state seeks to have its own national currency. Its own currency allows for real and flexible management of the domestic economy, ensures complete independence of the country from other states pursuing their monetary policy in their own interests; protects the national economy more reliably from inflation, which can be brought in from other countries.


That is why today most countries in the world have their own national money. In the context of a multiplicity of currencies, it becomes necessary to exchange them in the process of international economic relations. Currency exchange is carried out in accordance with their exchange rate. Currency is the monetary unit of the nation state. But there are also collective currencies that are used not in one country, but in several.

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Loans in foreign currency in

International credit is loans received by the state, banks, entrepreneurs, etc. from foreign creditors or provided to foreign borrowers.

Loans in foreign currency have been used in practice for a long time. In addition to replenishing working capital, such operations also allow you to optimize income tax by including interest on the loan in the composition of expenses.

Consumer loans (vay tiêu dùng) can be taken both for a specific purchase – targeted, or without specifying the upcoming expenses. For example, if you take out a POS loan at a furniture or electronics store, the bank transfers the money directly to the seller. This is a targeted loan. If you take loans or consumer loans (vay tiền tiêu dùng) and do not report what you spent it on, it is considered inappropriate. For targeted loans, the rates may be lower, especially if it is an affiliate program of a store and a bank.

Why do loans exist?

Loans are provided to borrowers to carry out activities related to:

  • development of production and trade;
  • investment activity;
  • privatization of state property;
  • satisfaction of consumer needs;
  • other areas of economic activity.

Some payers use a bank as an intermediary for providing consumer loans (vay tiền tiêu dùng), which provides a loan to a resident.

The essence of the scheme is that a non-resident opens a deposit in a bank, and a resident receives a loan in the same bank in the amount of the deposit. In this case, a non-resident can vouch for the resident with his deposit (that is, transfer the rights of claim on this deposit or a certificate of deposit as a pledge to the bank).

In risk-based pricing, lenders typically require extremely high interest rates as a condition for extending the maturity of an unsecured consumer loan (vay tiêu dùng không thế chấp).

The influence of the exchange rate on the financial performance of the enterprise on the example of the purchase of raw materials and supplies

In the modern economy, a significant part of business transactions is associated with foreign economic activity, with the movement of goods across state borders. The purchase of goods in other countries or their export leads enterprises to the need to conclude contracts for the supply in foreign currency. As a consequence, the problem arises of accounting for the impact of changes in exchange rates on the financial performance of organizations.

What is the exchange rate?

Exchange rates and their role in the economy - What is the exchange rate
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The exchange rate is understood as the price of the monetary unit of one country, expressed in the monetary unit of another country. Fixing a national currency in a foreign currency is called a currency quote. Exchange rates change on a daily basis, which affects the financial markets and the real sector of the economy. The influence of the exchange rate of currencies should be taken into account both by enterprises that are importers of raw materials and materials, and by exporting enterprises.

Changes in exchange rates of currencies occur under the influence of a significant number of factors and are associated with a high level of uncertainty in forecasting the mutual position of currencies in the future. The frequency of changes and the high degree of uncertainty in changes in exchange rates require an assessment of their impact on the financial performance of enterprises.

This factor is especially important for importing enterprises, since they sell products in national currency. Therefore, they are exposed to the risk of significant changes in financial performance due to adjustments in exchange rates.

The main foreign currencies in which contracts for the supply of raw materials and materials are concluded are the US dollar (USD) and the euro (EUR). The rates of these currencies are set by the Central Bank on a daily basis, taking into account a set of factors affecting the mutual position of currencies.

For enterprises-importers of raw materials and materials, changes in exchange rates are subdivided into a decrease in the national currency rate and an increase in the national currency rate in relation to the currency in which the supply agreement is concluded.

A decrease in the exchange rate of the national currency in relation to the currency specified in the supply agreement means that the price of the supplied goods in the national currency increases. The cost of incoming imported raw materials and materials is included in the cost of manufactured products as they are consumed.

At the time of sale of products manufactured from imported components, the cost of sales is formed. Thus, the increase in the price of raw materials and supplies caused by the depreciation of the exchange rate of the national currency leads to an increase in the cost of sales and a fall in the gross profit of the enterprise.

Impact of the exchange rate on the economy

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The value of the exchange rate and its change – have a very large impact on the economy of any country that participates in international trade.

A simple example: you are going to Paris and want to buy a Parisian souvenir (a little Eiffel Tower that you can show your friends later). A souvenir costs, say, two euros. If the ruble is valued highly, for example, 1 ruble. can be exchanged for 1 euro, then to buy a souvenir you will need 2 rubles. If the international price of the ruble falls and to get 1 euro, you need 10 rubles, then a souvenir will cost 20 rubles, and if you exchange 1 euro for 35 rubles. a souvenir will cost 70 rubles. Perhaps in the latter case, you even decide to abandon the purchase.

On the other hand, let’s take a French student who goes to Moscow. He also wants to buy a souvenir – a keychain with the Kremlin tower. At a price of 1 rub. in 1 euro, if the keychain costs 10 rubles, the student will have to pay 10 euros. When the ruble exchange rate changes up to 10 rubles. for 1 euro (this means an increase in the international value of his national currency, euro) he will need 1 euro. And when the rate becomes equal to 35 rubles. for 1 euro, the keychain will be very cheap, only 10/35 ~ 0.229 euro. Maybe he’ll even buy two key fobs.

Thus, the exchange rate allows us to estimate the value of our national goods in foreign money, and to translate the prices of foreign goods into the national currency. The increase in the international value of the national monetary unit (the fall in the exchange rate) is accompanied by a decrease in the cost of foreign goods for us and an increase in the cost of our goods for foreigners. The decrease in the international value of our money (increase in the exchange rate) means that foreign goods are becoming more expensive for us, and our goods for residents of other countries will now cost less than before.

When imports are cheaper, demand for them rises

If foreign goods for citizens of a country become cheaper due to changes in the exchange rate, its consumers will want to buy more of them. The import of foreign goods to this country will increase. At the same time, national goods will be more expensive for foreign buyers, they will be ordered in a smaller volume, and the export of national goods to other countries will decrease.

When imports are dearer, demand for them falls

When a change in the exchange rate leads to an increase in the cost of foreign goods, consumers reduce demand for them, imports fall. A simultaneous reduction in the price of national goods in the markets of other countries will lead to an increase in foreign demand and export of the country.

Suppose the state wants to stimulate the national economy by devaluing the national currency. Since Monday, the Central Bank sets a lower exchange rate for the national currency. Does this mean an automatic and unconditional expansion of net exports (decrease in imports and increase in exports) for the country?

Let’s consider export

On the one hand, the depreciation of the national currency means that exports to foreign companies are now cheaper, foreign firms can spend less of their own monetary units to purchase the same product. However, in the modern world, production is rarely done on the principle of instant purchase. Export contracts are discussed for a long time and are concluded for quite long periods.

Therefore, even if the price of an export unit has decreased, the volume of export purchases cannot be immediately increased due to the validity of contracts. Only when the term of the contract comes to an end, foreign firms can decide to expand export volumes.

On the other hand, even if we imagine an ideal economy in which contracts can be renegotiated at any given time, there is still a production side. Domestic producers producing products for export will not be able to increase production overnight, even with a very significant increase in demand for their products. The construction of the plant, the hiring of personnel, the execution of export documentation – all this requires a certain, sometimes significant, time.

Now let’s see what happens with the import

On the one hand, there are also favorable opportunities for the country. The depreciation of the national currency means a rise in the cost of imports. But imports are also a result of both prices and volumes. When the price of imports rises for national consumers, the dynamics of the volume of imports depends on the reaction of buyers. Imports may not decline or only slightly decline in the case when the price elasticity of domestic demand for imported products is low (imports are price inelastic).

In addition, since the imported goods and services met some need of domestic consumers, this need will continue to exist. The speed of import substitution plays an important role here: to what extent can domestic products satisfy the same needs of individuals and firms; how quickly domestic manufacturers will be able to master or increase the volume of production of replacement products.

Interesting related article: “What is International Trade?