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?
In: 3
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.
Latest Answers