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In conclusion, when exchange rates appreciates, exports will be more expensive and imports will be more cheaper thus, demand for exports fall and demand for imports increases.However, balance of payment will only improve if the demand is inelastic but worsen if the demand is elastic.

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When the exchange rate appreciates, it cause the country’s exports to be expensive and imports to be cheaper. When the price of exports increases, it makes domestic goods uncompetitive, hence the demand for exports decreases. The firms will employ less resources to cut back in production, so the industry will contract and unemployment increases. Hence, the national income and government revenue will decrease, and cause a fall in economic growth. To ensure a balance of payment equilibrium, the government will have to hold reserves of foreign currency, but with the lack of confidence by foreigners towards the economy foreign direct investment decreases.

However, the appreciation in the exchange rate makes imported raw materials cheaper which will cause a decrease in the cost of production. This will cause the export goods to be more competitive. In contrast, if the price elasticity of both exports and imports is elastic, the balance of payment will worsen as the export is more expensive than imports it will cause a fall in total revenue and an increase in total expenditure.

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The above diagram shows an appreciation in floating exchange rate system. This is due to an increase in the demand for £. This shifts the demand curve from D1 to D2 and the exchange rate to increase from 1.50 to 1.70. One factor leading to the  increase in demand for £ is an increase in UK interest rates. This will lead to more money flowing into UK as foreigners will want to invest in UK to take advantage of the high interest rates.

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An appreciation in the floating exchange rate system is also due to a fall in supply of £. This shifts the supply curve , thus increasing P1 to P2. As interest rates in UK increases, UK residents will invest in UK to take advantage of the high interest rates rather than investing in foreign countries where there are lower interest rates, hence the fall in supply of £.

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Exchange rate is the rate at which a unit of one country's currency can be exchanged for one another. For example, £1 = US$2. Exchange rate is used to determine the currency of any country and it is also crucial to every other country because it is used to trade or buy foreign goods. In this case, the country wants to use floating exchange rate and whether they can benefit from the appreciation of its currency. Floating exchange rate is where a country's currency price is determined and affected by the forex (foreign exchange rate). If there is no government intervention in the forex, the exchange rate will fluctuate whether it is going up or down according to the demand and supply.