center-231Impact of Exchange rate on the Economy growth of Sri lanka00Impact of Exchange rate on the Economy growth of Sri lanka21030622964007centercenterGroup-1600Group-16
Members
Group No-16
Index Number Name
175079D Srishan O.P.D.

175080X Suapasala J.G.S.

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175081C Tennakoon T.M.K.R.B.

175082F Thilakarathna M.G.H.N.

175083J Thilakarathna W.M.D.S.

174082X Lakmali A.G.L.B.

174083C Lakshan P.U.V.

175084F Lakshan W.L.P
174085J Lakshitha S.U.

174087R Liyanagunawardhana N.

174088V Liyanapathirana P.T.

What is Exchange rate?
Exchange rate is the price of a nation’s currency according to another currency note. Thus, Exchange rate consists of two parts, and can be either directly or indirectly quoted between the domestic currency and foreign exchange. In a straightforward euphemize, the price of a forex is expressed in terms of domestic currency. In the cursory opinion, the local currency unit has been declared as foreign exchange for the unit price. The exchange rate is derived from the value of the US dollar. However, exchange rates are relative to those of another nation. It is called cross-price or cross rate.

Exchange rate can be divided into three types,
-Fixed exchange rate
-Floating exchange rate
-Flexible exchange rate
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-Fixed exchange rate
The fixed amount of money captured the currency of a country for certain commodities or other widely used currencies. The dollar is used for most international trading transactions. Today, most of the transaction currency currencies are held in US dollars. Money is financed by money from their partners, which often sell their discoveries.

Advantages
It provides currency stability.

Foreign investors attraction will increase.

Inflation can be avoiding to the country.

Disadvantages
It is expensive to maintain. Country should have enough foreign exchange res

-Floating exchange rate
The floating exchange rate is the system in which the currency is determined on the Forex market, on the basis of supply and demand compared to other currencies. This is in contrast to a fixed exchange rate, in which the government entirely or predominantly determines the rate.

Advantages
Management of exchange rate does not necessary.

No need to involve the central bank.

Disadvantages
Floating exchange rates are highly volatile.

Higher volatility in exchange rates increases the exchange rate risk that financial market participants face.

Floating exchange rates may aggravate existing problems in the economy.

-Flexible exchange rate
Exchange rate in accordance with the exchange rate and demand for other currencies. If there is a high demand for a particular currency, its exchange rate increases compared to other currencies, and if the demand is low, its cost is reduced. Opposite of fixed exchange rate.

Advantages
It is automatically stabilized.

countries can apply an independent monetary policy to address inflation and product-related problems.

Disadvantages
Flexible exchange rate is more volatile.

Under the flexible exchange rate regime, the expansion or decline in monetary policy may lead to crisis or inflationary pressures.

What is Economic Growth
Economic growth, economic efficiency and productivity increase in terms of economic growth compared with other periods. To measure the economic growth most suitable measurement is Gross domestic product(GDP).

GDP measures the final production of the country. By world bank uses Gross national income instead of GDP.

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Main factors influencing exchange rate
Differential in inflation
Differentials in interest rates
Current-Account Deficits
Public Debt
Terms of Trade
Political Stability and Economic Performance
Differential in inflation
The country’s inflation rate may have a significant effect on currency value and exchange rate in other currencies. However, inflation is the only factor that unites the country’s exchange rate.

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Current-Account Deficits
The current account deficits will be increasing by the decline in the exchange rate. In the floating rate system, the government avoids intervention to determine the exchange rate. That leaves the determination of the exchange rate to the interaction of supply and demand for domestic currency in relation to foreign exchange.

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Public Debt
When a country is considered a high public debt, without a credible plan for dealing with it, which may have a negative impact on the value of its currency.

Terms of Trade
If export prices are higher than import prices, it is said that there is an improvement in trading conditions. If import prices increase in comparison with export prices, it is alleged that there is a deterioration in trading conditions.

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Current Exchange rate condition in Sri lankaright289214
Since 2001 Sri Lanka economy run-on Floating exchange rate.

floating exchange rate:
a regime where the currency price is set by the forex market based on supply and demand compared with other currency.

Central Bank doesn’t control involve to determined the exchange rate
Sri Lanka has a clear floating exchange rate.

How exchange rate affect to the economic growth
From the beginning, people exchange goods to meet their needs. When progress is made, improving its borders will improve the transfer of countries and communication networks between countries. In a world that produces and exports goods and services. The tool used in this trade is money. Money is the one of the main factors in economy. By considering economy Sri Lanka has a floating economy. Because of fluctuations in the exchange rate over time, the parties involved in foreign trade face many uncertainties. Exchange rate analyzes are provided.

Government revenues and expenditures due to inflation due to low exchange rate inflation.

Exchange rate volatility significantly affects foreign investment and debt.

The exchange rate has positively responded to economic growth in Sri Lanka at 1 per cent
The country’s economic growth has been boosted by a high exchange rate. Effect of the exchange rate on economic growth: The nominal value of the experimental test relative to relative economic growth is a major challenge. It is even more difficult to determine the direct effect of direct influence. R. R. (Foreign exchange prices), inflation (local price change), economic growth (real income change) is already important.

Reference
https://www.dummies.com/education/finance/international-finance/advantages-and-disadvantages-of-floating-exchange-rates/https://www.quora.com/How-does-a-current-account-deficit-affect-the-exchange-rate-in-a-floating-exchange-rate-regimehttps://www.economicshelp.org/blog/2016/economics/terms-of-trade-effect/