How does a weak currency help with exports?


How does a weak currency boost exports if the exporting country uses the USD as a “base” currency?

In: Economics

Other countries have to pay you in your – now weaker – currency, so they get more bang for their buck. So they buy you more. So you export more

Say you make widgets and sell them for 10SEK. Today that’s 1.14USD. So for 100 USD a foreign buyer can buy 87 widgets. Tomorrow SEK weakens and the fx rate is 10 SEK for 1USD. So the same buyer now can buy 100 widgets for 100USD and presto, you are exporting more.

Your premise of using USD as a base currency is flawed. That applies to oil, gold and other commodities whose price is more or less fixed worldwide. In this case having a weaker currency is not that big of an edge. Sure, by having a weaker currency you can buy more local stuff with 100USD, but you don’t offer any competitive advantage compared to your competitors.

Where a weaker currency is a real advantage is when you actually make prices in your own currency. Since your currency id weak you can have ridiculously low prices for someone using USD but still good enough in local currency. The downside to that is that if you want to buy a car or an iPhone or anything that is not produced in your country you’re screwed.

Example: you export tables.

Lets say local currency exchange rate is 10:1 USD, so you can buy 1 usd for 10 something of local currency.

price of a table is 100 usd and 1000 local.

When the price of the local currency falls, (to simplify) local prices stay the same, but prices of foreign goods increase.

So, when your currency get devauled by 10% means the price of table in usd is ~10% more expensive.

New exchange rate is ~11:1 USD

Now the price is still 100 usd but ~1100 local currency.

Therefore you can pay your costs locally and sell tables internatioally more profitably.

Compared to previous situation, if you export tables for a normal price of 100 USD you get 100 local currency more than previously (1100 compared to 1000).

That means you can export a table for local price 90USD and make the same amount of money in local currency as previously, essentialy out competing foreign companies that have still sell tables for 100 USD.