Economics Questions

Re: How does debasing your currency help exports?

John James — Tue, 08 May 2012 02:47:56 GMT

hehe. That's what you get for thinking logically.

Now you understand part of the reason Austrians don't buy into such a notion as "devaluing a currency to boost exports". (And believe it or not, there are still other reasons the idea makes no sense.)

Jesse Cohen:
****Depreciating the currency doesn't make domestic goods cheaper for foreigners, it just makes goods more expensive for those in the home country.

In a way, it actually hurts both.

Re: How does debasing your currency help exports?

Jesse Cohen — Tue, 08 May 2012 02:47:16 GMT

****Depreciating the currency doesn't make domestic goods cheaper for foreigners, it just makes goods more expensive for those in the home country.

Re: How does debasing your currency help exports?

Jesse Cohen — Tue, 08 May 2012 02:43:01 GMT

My confusion relates to the original question. If my thinking is right, that exchange rates come directly from goods prices for each currency, then depreciating a currency to help exports makes no sense. If a currency is valued less, it's because it takes more of it to buy something. This doesn't make the good cheaper in relation to other currencies, it just makes it more expensive in the home currency, at least for those receiving the money last, of course.

Re: How does debasing your currency help exports?

John James — Tue, 08 May 2012 02:24:26 GMT

Jesse Cohen:
Fair enough. Canadian dollars goes from 1:1 to 2:1. Same question.

I'll requote it with your changes:

"If the Canadian dollar goes from 1:1 to ~~1:2~~ 2:1 against the US dollar, doesn't that mean relative prices have doubled? Why else would it take twice as many Canadian dollars to buy one US dollar???"

The answer is "yes". I'm not sure where your confusion is.

Re: How does debasing your currency help exports?

Jesse Cohen — Tue, 08 May 2012 02:03:22 GMT

Fair enough. Canadian dollars goes from 1:1 to 2:1. Same question.

Re: How does debasing your currency help exports?

Willy Truth — Sun, 06 May 2012 21:41:15 GMT

Most of SE Asia did that and became the largest industrial exporters in the world.

Re: How does debasing your currency help exports?

John James — Sun, 06 May 2012 19:18:32 GMT

Lawrence:
Some answers mentioned "income/substitution effects" and the "costs to producing", which wasn't wrong but really wasn't a precise answer. The relevant answer is that the fundamental cause of an increase in exports through inflation is that wealth is robbed from savers and given to people who will buy exports.

That is not what you said. You said you read the answers in this thread and "they all seem to be wrong or misguided". You said that the idea that inflation helps exports "exists because of what some countries, notably China and Japan, have done."

I won't even ask you to go through every single post here. Once again, just explain what is "wrong" or "misguided" about the very first response in this thread, here.

Re: How does debasing your currency help exports?

Lawrence — Sun, 06 May 2012 14:55:15 GMT

My main point was that it only helps exports because it is a redistribution of wealth from the savers of the currency being debased to the receivers of the printed money. Therefore, it only helps exports as long as the money lands in the foreign exchange markets or in the hands of foreigners who will purchase from the exporters.
If the government prints money and then gives it to a citizen of the nation and then he spends it, it will make domestic prices rise first and so there will be no benefit to exports.(This was previously mentioned.)

Some answers mentioned "income/substitution effects" and the "costs to producing", which wasn't wrong but really wasn't a precise answer. The relevant answer is that the fundamental cause of an increase in exports through inflation is that wealth is robbed from savers and given to people who will buy exports.

The reason everyone(Keynesians and socialists) believes that debasing a currency helps exports is because of the exports minus imports aspect of the GDP and because of how the export-led economies have operated.

Re: How does debasing your currency help exports?

John James — Sun, 06 May 2012 05:33:01 GMT

Jesse Cohen:
I'm even more confused. My thinking is that exchange rates are determined by what each currency can buy, or goods prices. If the Canadian dollar goes from 1:1 to 1:2 against the US dollar, doesn't that mean relative prices have doubled? Why else would it take twice as many Canadian dollars to buy one US dollar???

If the Canadian dollar goes from 1:1 to 1:2 against the US dollar, it means you can buy 2 US dollars with 1 Canadian dollar. Meaning it takes half as many Canadian dollars to buy one US dollar...not twice as many.

Lawrence:
I read most of the answers and they all seem to be wrong or misguided. The infamous "inflation helps exports" doctrine/belief exists because of what some countries, notably China and Japan, have done. They are so-called export economies. What does China do? China(the Chinese central bank) prints large amounts of the Renminbi, then goes on the foreign exchange markets and dumps Renminbi in exchange for U.S. dollars. The printed Renminbi must then be used to buy stuff from the exporters since it is received by foreigners(U.S. citizens). It is a simple redistribution from savers of the chinese currency to the U.S. citizens who receive large amounts of Renminbi in exchange for their U.S. dollars.

That doesn't answer the question. You haven't offered anything on this topic. Please explain what is "wrong" or "misguided" about the answers given. (Particularly the article linked in the first response here.)

Re: How does debasing your currency help exports?

Lawrence — Sun, 06 May 2012 05:16:42 GMT

I read most of the answers and they all seem to be wrong or misguided. The infamous "inflation helps exports" doctrine/belief exists because of what some countries, notably China and Japan, have done. They are so-called export economies. What does China do? China(the Chinese central bank) prints large amounts of the Renminbi, then goes on the foreign exchange markets and dumps Renminbi in exchange for U.S. dollars. The printed Renminbi must then be used to buy stuff from the exporters since it is received by foreigners(U.S. citizens). It is a simple redistribution from savers of the chinese currency to the U.S. citizens who receive large amounts of Renminbi in exchange for their U.S. dollars.

Re: How does debasing your currency help exports?

Jesse Cohen — Sun, 06 May 2012 04:45:41 GMT

I'm even more confused. My thinking is that exchange rates are determined by what each currency can buy, or goods prices. If the Canadian dollar goes from 1:1 to 1:2 against the US dollar, doesn't that mean relative prices have doubled? Why else would it take twice as many Canadian dollars to buy one US dollar???

Re: How does debasing your currency help exports?

krazy kaju — Thu, 03 Feb 2011 16:27:11 GMT

EmperorNero,

Just to add to your demand-side analysis, that is why lower individual, capital, and corporate taxes can also increase the value of a currency. Lower taxes on income in one country will act an an incentive for individuals to invest more in that country. Take the US and Canada as an example. If the US lowers these three taxes, then more Americans will have a greater incentive to invest in American assets, as opposed to Canadian assets. Furthermore, more Canadians will have a greater incentive to exchange their Canadian Dollars for US Dollars and invest in American assets. The result is that the USD rises against the CAD.

Re: How does debasing your currency help exports?

cr113 — Thu, 03 Feb 2011 16:14:20 GMT

EmperorNero,

The more I think about this the less sense is makes that artificially debasing your currency would help exports. It seems like it will actually do the opposite if you follow Milton Friedman's logic. Go back to my Canada-US example where Canada and the US are the only 2 countries in existence. Starting off the exchange rate is 1 to 1. Beer cost $5 in both countries. US artificially doubles its money supply. I would think that the first thing that would happen is that the price of beer in the US would start climbing, lets say to $6. Now it would be cheaper for citizens of both countries to buy beer in CANADA since the exchange rate is 1 to 1! So THEN there will be a rise in demand for Canadian dollars which will raise the exchange rate. So how would that EVER help US exports? The US inflation is actually going to make US exports more expensive in the short term.

Are there any real world examples of a country debasing its currency and increasing exports? Zimbabwe? Argentina?

Re: How does debasing your currency help exports?

EmperorNero — Thu, 03 Feb 2011 01:00:22 GMT

That's true. But I think you asked why an artificial debasement of the currency would have effects on exports. The suggestion being that price increases would negate any debasement of the currency. The answer to your question is, I think, that exchange rates are not just determined by the money supply, but also by supply and demand of currencies. If Japan and Canada both want beer from the US, they will bid for Dollars with their respective currencies. And that will determine the price of Dollars. So for example a weak yen means that the Japanese are getting fewer US Dollars for their yen so US Dollars will be cheaper in terms of Canadian Dollars. If a country artificially debases it's currency it makes it's exports more affordable. Of course that doesn't make it richer.

Re: How does debasing your currency help exports?

cr113 — Thu, 03 Feb 2011 00:20:25 GMT

EmperorNero:

Suppose there are only 2 countries in the world, Canada and the US. Suppose they both allow their currencies to float freely and the result is a one to one exchange rate. If the US then doubles its money supply I'm willing to bet that the exchange rate between the 2 countries will eventually float to 1 Canadian dollar to 2 US dollars. Exactly for the reason Milton Friedman states.