A real depreciation of the domestic currency hurts domestic ________ firms who must then compete against less expensive imports.

Question

Quizplus · Accepted Answer

Import-competing firms are those that produce goods and services that compete with imports from other countries. When the domestic currency depreciates, imports become cheaper relative to domestically produced goods, making it more difficult for domestic import-competing firms to compete in the market. Exporting firms, on the other hand, benefit from a weaker domestic currency because their products become cheaper for foreign consumers. Similarly, importers benefit from a weaker domestic currency because they can buy foreign goods at a lower cost. Export-competing firms are not directly affected by changes in the exchange rate.

A Real Depreciation of the Domestic Currency Hurts Domestic ________