Planning and Budgeting

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Exchange rates changes can be employed as an economic policy instrument to realize the goals of policy-makers. This instrument is used in the economies where the exchange rates are not fully floating. In other words, it could not be used in the economies where the exchange rates are determined only by the exchange rates market mechanism. This is to say, such an instrument should be applied in the economic systems in which the exchange rates are determined in a fixed or controlled floating manner. When the exchange rate increases, it is expected that the prices of import goods increase, leading to the decreases in the demand for import goods. On the other hand, as exchange rate is increasing, the domestic products become cheaper in foreign markets, causing the exports to increase. As a result, the exports increase and imports decrease should stimulate production sector to raise the output. It is to be noted that the degree of exchange rate influence on the export and import refers to the elasticity of demand for the export and import. Nonetheless, market shares of these goods play a specific role in increasing the demand for the products. Hence output increase might not be sensible. In order to study the effects of the exchange rates changes on the amount of production, imports and exports of products, this article makes use of Computable General Equilibrium (CGE) Models. The advantage of CGE models over econometric models is that the former makes it possible to study the implications of performing a policy in the framework of a systematic model, composed of various economic variables. Meanwhile, CGE models are independent of time series data. This article tries to study the impacts of the exchange rate variations on the levels of prices, productions, imports and exports of various economic sectors. In the mean time, the effects of the exchange rate variations on the GDP and its components are to be discussed in the article as well.

Keywords: Exchange Rate, Imports-Exports, GDP, Economic Sectors, Computable General Equilibrium (CGE) Models

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