(a) (i) Explain the term exchange rate - Leaving Cert Economics - Question 6 - 2016

An appreciation of the euro against the US dollar can have several economic effects on the Irish economy:

1. Imports Cheaper: The increased value of the euro makes imports from the US cheaper, allowing Irish consumers to benefit from lower prices on foreign goods.

2. Exports Dearer: Conversely, Irish exports become more expensive for US buyers, which may reduce demand for Irish products in the US market, potentially harming local producers.

3. Impact on Employment: Industries reliant on exports to the US may face reduced sales, leading to potential layoffs or reduced hiring.

4. Investment Flows: A strong euro could lead to increased investment in Irish assets from American firms, as their purchasing power increases.

5. Economic Growth: Overall, an appreciating euro may slow down economic growth if export-driven sectors suffer significantly.

The balance of payments (BOP) account consists of three main components:

1. Current Account: This records all transactions related to goods and services, income payments, and current transfers. It includes exports and imports as well as remittances and income earned abroad.

2. Capital Account: This captures the flow of funds for capital transfers, such as debt forgiveness and migrants' transfers. It accounts for transactions that do not affect the financial account directly.

3. Financial Account: This section tracks financial transactions that involve assets and liabilities between countries, such as direct investments and portfolio investments.

A surplus in the BOP current account indicates that the value of a country's exports exceeds the value of its imports plus any payments made to foreign entities. Essentially, it means that a nation is bringing in more income from foreign trade and transfers than it is spending abroad, thereby contributing positively to its overall economic position.

Yes, a surplus on the BOP current account can create several issues for an economy:

1. Currency Appreciation: A persistent surplus may lead to an appreciation of the national currency, which could harm the competitiveness of exports in the long term.

2. Domestic Inflation: High demand for local goods caused by foreign demand can increase domestic prices, leading to inflation.

3. Dependence on External Markets: Structure reliance on foreign markets can be risky if there are sudden shifts in global demand.

4. Investment Imbalances: A surplus may discourage inward investment and innovations if local businesses rely too heavily on external markets rather than developing domestic capacity.