Currency Devaluation: Exports > Imports

Currency devaluation means a reduced value of currency with respect to foreign currencies and its reduced purchasing power to foreign goods, which result from monetary policy.

In a small open economy, as such the assumptions of the Mundell-Fleming model, currency devaluation can result from expansionary monetary policy, referring to the lower exchange rate instead of the lower interest rate.

Because of the Impossible Trinity a central bank could not act independently having to expand or contract to maintain a peg with a fixed exchange rate system (devaluation), and therefore is often replaced by a floating exchange rate (depreciation) which gives more power to act as it allows monetary expansion without some backing.

The Imposible Trinity

Currency devaluation assumes only one country devalues while other countries don’t, alternatively a ‘race to the bottom’ is referred to as each country competes to devalue their currencies more.

Currency devaluation basically just repudiates debt where creditors and savers lose.

Mercantile sway, toward favouring exports over imports, the lower exchange rate makes imports expensive and import less, while exports are cheaper and export more.

Importing goods that have inelastic demand curves would not be stopped from currency devaluation, it would just make them more expensive, and favour domestic producers.

Producers boost exports with low interest loans, and exporters purchase factors of production at current prices.

In the short-run firms could keep same low foreign currency prices by not passing on devaluation.

Currency devaluation causes less domestic consumption, wealth, and purchasing power.

It preserves a nominal wage height or further increases it, while the real wage sinks or is unaccounted.

It attracts foreign immigration/tourists, high cost limits domestic immigration/tourism.

In conclusion, a real competitive advantage requires free markets/trade, property rights, limited/zero taxation, and savings.


Featured image supplied from Pixabay.

Copyright © 2016 Zoë-Marie Beesley

Creative Commons License Licensed under a Creative Commons Attribution 4.0 International License.

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