I hear this all the time. China artificially decreases the value of their currency by buying up USD to make their products more competitive in the global market. Traveling to Europe is cheaper now that the Euro has gotten slightly weaker. How does this work?
Let’s say Grayboot Dollars are pegged to US Dollars at a 1:2 ratio. If I want to export my product to the US for US$2, won’t I simply price it at GD$1? It’ll cost slightly less in my currency, but that’s to be expected because it’s a powerful, deflated currency. So how exactly does this work?
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Anyone who makes stuff has to pay local costs like rent, wages, utilities etc. The product has to be sold at a price that (at least to stay in business long term) is greater than these costs.
So if these costs are in local currency terms and the local currency is weak, then the selling price will be low relative to another country whose costs will be higher if they tried to make it themselves (as their salaries, rents, etc will be priced in higher valued currency).
This is why a low valued currency tends to be associated with a greater ability to produce exportable stuff. What is more important (in real life) is not the absolute levels of currencies but their movement over time and the associated levels of costs in the currency.
Because companies pay their employees in their local currency. If the local currency is artificially manipulated so 1 dollar buys more of that local currency, then the exports of that country would be cheaper to buy with the US dollar.
lets say 1USD=1EUR, EU makes a dothat for 2EUR, US company the same dothat for 2USD, all is good doesn’t matter who you buy it from it cost the same 2EUR or 2USD.
Now the EUR drops in value so 2EUR = 1USD, now if an american buy an EU dothat it costs 1USD, and if a European buys a US dothat is cost 4EUR
Let’s say $1 = €1. A €50k BMW costs $50k. Now, the Euro strengthens to $1.20. That same BMW now needs to cost $60k in order to remit the same €50k to Germany to pay the workers and suppliers their same wages and parts costs. If BMW cut the price for the American imports, then they’d have less money to pay their expenses in Europe.
On the flipside, that $80k Corvette gets cheaper for the European buyer, because now they only need to pay €66,700 for the American sportscar while GM continues to collect the same $80k it needs to pay it costs to American employees, parts suppliers, shareholders, etc.
Exchange rates are different from domestic purchasing power.
If China decreases the value of the RMB relative to the USD, while purchasing power within those countries stays the same, then Chinese goods have gotten cheaper for Americans. Note that Chinese exporters are still getting the same amount for their goods, provided they buy goods in China. This also works in reverse, with a weakening currency making imports more expensive even relative to price levels.
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