Aside from making their exports more attractive, what does China have to gain by keeping their currency undervalued?
It seems as if this is hurting them more than it helps them.....so why would they do this?
krazy kaju: Also, the Chinese government gets to build huge reserves in gold and foreign currencies, which could help them out a lot in the future.
Also, the Chinese government gets to build huge reserves in gold and foreign currencies, which could help them out a lot in the future.
Jonathan M. F. Catalán: David Sherin: Same here. I just read an article that said when a currency strengthens, prices in that country go up (???). I've never heard an explanation for this, but it makes no sense to me. Maybe there is a reason for it, something to do with fiat money or central banking (I don't know), but I agree that a free market would not operate like that. At least in the current currency system in place, it has to do with dollar conversion. Take for example Germany and the BMW. The BMW factory in Germany sells the product to distributors in the United States in Euros. Let's say it's worth 50,000€. A strong euro means that it takes more dollars to convert to the necessary euros to buy the car. So, in the United States a Euro that is worth twice as much as the dollar would make a BMW cost $100,000, while a weaker euro would make it cheaper in dollars. So, Ensuric is right. They make the product cheaper for the importer, but more expensive for their own people. Over the long run it just means global poverty (especially since it's really spiraling, as every country depreciates its currency). The problem is that they don't take into account the transfer of capital, and they overplay the importance of not having a trade deficit (which is a ridiculous notion, anyways; why would an individual economic actor trade for something that he gets less utlity out of than what he gave in return?).
David Sherin: Same here. I just read an article that said when a currency strengthens, prices in that country go up (???). I've never heard an explanation for this, but it makes no sense to me. Maybe there is a reason for it, something to do with fiat money or central banking (I don't know), but I agree that a free market would not operate like that.
Same here. I just read an article that said when a currency strengthens, prices in that country go up (???). I've never heard an explanation for this, but it makes no sense to me. Maybe there is a reason for it, something to do with fiat money or central banking (I don't know), but I agree that a free market would not operate like that.
At least in the current currency system in place, it has to do with dollar conversion. Take for example Germany and the BMW. The BMW factory in Germany sells the product to distributors in the United States in Euros. Let's say it's worth 50,000€. A strong euro means that it takes more dollars to convert to the necessary euros to buy the car. So, in the United States a Euro that is worth twice as much as the dollar would make a BMW cost $100,000, while a weaker euro would make it cheaper in dollars.
So, Ensuric is right. They make the product cheaper for the importer, but more expensive for their own people. Over the long run it just means global poverty (especially since it's really spiraling, as every country depreciates its currency). The problem is that they don't take into account the transfer of capital, and they overplay the importance of not having a trade deficit (which is a ridiculous notion, anyways; why would an individual economic actor trade for something that he gets less utlity out of than what he gave in return?).
Thanks for that explanation. It makes more sense now. I would laugh every time I learn more about this convoluted system we live in if it weren't so serious.