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I have the typical answer:

"A cheaper currency means exports will go up because it's cheaper to buy from us!"

Yeah, sure, but that's obviously full of holes.

Let's have a simple situation:

  • We have China (yuan) and America (\$).
  • America needs 100 "item" from China every year.
  • One "item" costs 1 yuan.

Now, let's say currently (situation A):

  • The rate is 1\$:1yuan
  • That means America pays \$100 every year.

In situation B, we devalue the Yuan:

  • The rate is 1\$:2yuan
  • That means America now does one of the following:
    • Only pays 50\$ and still gets the same 100 items.
      • China basically just lost 50\$ a year. China loses.
    • Still pays 100$ but now gets 200 items instead:
      • China gets the same 100\$ but is now giving out 200 items instead. China loses.

So, how exactly would China ever benefit from devaluing its currency? It doesn't make any sense to me, you're literally just giving more exports, you are not getting anything more in return.

The only reason I could think of, is that they actually do think that, in order to stay competitive, they need to sell 2 items for 1$ instead of only 1 i.e. they do think it should be that cheap and they don't want the floating currency price to interfere with what they think should be the correct price for their products.

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    $\begingroup$ You're setting up a false dichotomy. What's to say America won't buy more than 100 dollars worth of goods at this point? That would be the point of devaluing the currency (although usually not by such a huge margin). $\endgroup$ – Kitsune Cavalry Dec 24 '15 at 14:29
  • $\begingroup$ so you're saying that the cheap rate would encourage America to buy more than just 100$ worth? $\endgroup$ – SpaceMonkey Dec 24 '15 at 14:30
  • $\begingroup$ Also, I said that because I supposed a country would import only what it needs, why import more than you need. $\endgroup$ – SpaceMonkey Dec 24 '15 at 14:32
  • $\begingroup$ You import what you need at a given price. If things become cheaper, you might need more since either you will gain more utility, or if it is an input of production, your marginal costs will fall, and you want to produce where marginal cost equals marginal benefit. $\endgroup$ – Kitsune Cavalry Dec 24 '15 at 14:53
  • $\begingroup$ ok, so the US may actually pay more than the 100$ when the price falls. Correct? Now China actually gets more dollars, but isn't that being offset by the fact that they are selling for less? $\endgroup$ – SpaceMonkey Dec 24 '15 at 14:57
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So going off of my comments, there's no reason to believe that just price or just quantity sold have to remain the same; when you change price, you end up moving along the demand curve.

A country may indeed only import what it "needs," but if the item in question is a unit of production, and the price of it effectively falls, then that lowers the marginal cost of production for any firms who want to import that good, so that will allow them to demand more of the good. If the item in question is a final good and preferences are monotonic and locally non-satiated, then a lower price would mean more people would want to import the good if the price fell. Selling more product could lead to a higher profit if $q'p' - c(q') > qp - c(q)$, where the primes indicate new quantity and new price, and cost is a function of quantity.

In the case where the benefit of a good does cap out completely, and firms/consumers in a country really don't want more of the good, then a country doesn't benefit in respect to that good when they devalue the currency, but you'll be hard pressed to find examples of that.

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  • $\begingroup$ Shouldn't you also mention that this benefit is not offset by the cheaper price i.e. that China in my example will actually benefit from the increased demand more than it will lose because of the cheaper price? $\endgroup$ – SpaceMonkey Dec 24 '15 at 15:26
  • $\begingroup$ It may or may not, that's the thing. I'll edit the answer to clarify. $\endgroup$ – Kitsune Cavalry Dec 24 '15 at 15:37
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The problem lies with your assumptions. Practical world trade doesn't usually work that way. No one ever devalues their currency by half.

This would be a practical assumption:

US buys toys from China - say x units. It also buy toys from Japan - say y units.

Chinese toys cost xx, and Japanese toys cost yy.

Now, the US would start buying more from China (say x + a), by substituting Japanese toys ( now the US buys y - b) with Chinese toys. (The US would never import more without substituting because it won't import more than what it needs, as pointed out by someone else here)

If production is China had slowed down before devaluation, this would result in more production. More jobs, more income for employees. A devaluation is done to boost exports, resulting in more production, resulting in more employment, resulting in an overall increase in economic activity, whether or not it results in a direct increase in the income received through exports (although it usually does)

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  • $\begingroup$ Are you saying that the US will now pay more than the 100$ by substituting from what they were paying to Japan? $\endgroup$ – SpaceMonkey Dec 24 '15 at 14:39
  • $\begingroup$ No, why do they have to pay more? If Chinese goods cost lesser than Japanese goods, the US would simply substitute whatever Japanese good they can with Chinese ones. $\endgroup$ – WorldGov Dec 25 '15 at 19:02
  • $\begingroup$ I would suggest that you also read up on 'currency wars' - it might be useful $\endgroup$ – WorldGov Dec 25 '15 at 19:02
  • $\begingroup$ Mate, yes. I meant that they would pay more TO CHINA and less to Japan, so their total is still the same. $\endgroup$ – SpaceMonkey Dec 25 '15 at 19:04

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