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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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.
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