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.
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