When a currency weakens, an imported item costs more in that currency even though its foreign price has not moved. Your explanation must say what is held constant, otherwise the cause of the rise is not clear.
This lesson is part of trade and exchange-rate reasoning. If you are not yet sure which way to divide or multiply, start with converting a quoted exchange rate in the correct direction.
How does a weaker currency raise an import’s cost?
The foreign seller is paid in foreign currency. A weaker ringgit buys less of it, so the same item needs more ringgit.
Stated as a chain: ringgit weakens, each unit buys less foreign currency, the ringgit price of the import rises, and the importer faces a higher cost.
Worked example: a fictional machine part
A workshop in Malaysia imports a part priced at B$200 from Brelland, an invented country. At first, RM1 = B$0.20.
Before. RM price = 200 ÷ 0.20 = RM1 000.
The ringgit then weakens to RM1 = B$0.16.
After. RM price = 200 ÷ 0.16 = RM1 250.
The change is RM1 250 − RM1 000 = RM250. As a percentage of the original, 250 ÷ 1 000 = 25%.
Check in the other direction: RM1 250 × 0.16 = B$200. The foreign price is unchanged, so the whole rise comes from the exchange rate.
Which assumptions should the answer state?
The rise of RM250 is a fair conclusion only under stated assumptions. These are the usual ones for an import-cost question:
- The foreign price stays at B$200.
- The quantity the workshop buys stays the same.
- Import duties and transport charges do not change.
- No other currency is involved in the purchase.
Each one rules out another explanation. If the foreign seller raised its price at the same time, the extra cost could not be blamed on the exchange rate alone.
The mistake to avoid
The common slip is to give the right number with no assumption, or to say the change is 20% because the rate fell 20%. Compare:
| Wrong | Right | |
|---|---|---|
| Result | “Cost rises by 20% because the rate fell 20%” | Cost rises by 25%, from RM1 000 to RM1 250 |
| Reason | “Because the currency is weaker” | Each ringgit buys fewer Brelland dollars, so more ringgit are needed |
| Assumptions | None | Foreign price, quantity, duties held constant |
The rate fell from 0.20 to 0.16, which is a 20% fall in the rate. The price is found by dividing, so its percentage change is different. Use the percentage base and index explorer if you want to test other bases.
A model explanation to adapt
“The ringgit weakened from RM1 = B$0.20 to RM1 = B$0.16, so each ringgit buys fewer Brelland dollars. The part still costs B$200, so the importer needs RM1 250 instead of RM1 000. Assuming the foreign price, quantity and duties are unchanged, the import cost rises by RM250, or 25%.”
Three sentences do the job: the rate move, the calculation, and the assumption-bound conclusion. Practise the same pattern with interpreting exchange-rate changes.
Check yourself
A shop imports a gadget priced at B$300. The rate moves from RM1 = B$0.25 to RM1 = B$0.20. Find the change in the ringgit price and state two assumptions.
Answer
Before: 300 ÷ 0.25 = RM1 200. After: 300 ÷ 0.20 = RM1 500.
The price rises by RM300, and 300 ÷ 1 200 = 25%.
Check: RM1 500 × 0.20 = B$300.
Assumptions: the foreign price stays at B$300 and the shop buys the same quantity. Import duties unchanged would also be acceptable.
What to study next
Go to evaluating a textbook mechanism without recommending a real political policy, then test yourself with the chapter practice.
For a teacher who can review your assumption sentences, see online one-to-one Economics tuition.