Increase in the
exchange rate may also mean that you can now buy more goods and services
because prices may go down relative to the exchange and that is called increase
in the real exchange-rate... You could also buy more foreign exchange and
foreign goods and services... Increase in the real-exchange-rate increases
exports since domestic-prices go down and also increase imports because
exchange-rate goes-up... However, increase in the nominal-exchange-rate would
only increase exports and lower imports because exchange-rate has gone down,
you can buy less foreign-exchange and goods... Strong-currency would increase
both, exports and imports; however depreciation would lower domestic demand and
demand for imports...
It is a common
knowledge that a strong currency would attract inflows and a weak currency
would increase outflows... Because, nominal exchange rate would increase, you
would have to pay more exchange rates or you would get less domestic
currency... That is why foreign investment's currency-risk is hedged by
derivatives... Foreign investment entails exchange-rate risks... But, exports
might increase due to lower exchange-rate...
It is natural for the
dollar to be stronger than other countries because it is the world's one of the most
favourite reserve currencies to settle exports especially oil... Moreover,
heightened foreign exchange reserve requirement to pay future streams of
exports and higher foreign investment in the US economy by other countries are
also responsible for an overvalued dollar... By selling/buying foreign currency
a country could try to manage the foreign-exchange rate with other countries,
but higher domestic-currency in circulation may stoke inflation fears in the
economy... However, if the country demands foreign exchange in the market it is
also likely to lower exchange rate of the domestic currency thereby increasing
exports... Differently, if a country allows more imports and increase in demand
for foreign exchange rate it is possible that it would increase prices in the
trading partners economy which could also increase domestic export
competitiveness... The US too might try to settle exports with other countries
in their own currencies to maintain competitiveness and a stable exchange
rate...
It is probably a matter
of real-wages in the trading partner’s economy... In order to achieve
devaluation or depreciation we forget that we are lowering domestic real-wages
by increasing inflation and also wages in the trading partner's economy by
curbing imports only to reduce deficit or increase surplus though a lower
unemployment is more important than deficits or surpluses and depreciation only
reduces domestic-demand and also demand for exports only reducing the
exchange-rate which is a matter of trade-off between domestic-demand and
foreign demand... After full-employment more demand for exports might result in
increasing wages and the economy might lose competitiveness... which might
increase deficit... The central banks try to control demand after
full-employment so how too much foreign demand might be good... And for this a
higher exchange rate may be used to control demand for exchange and exports for
price-stability in the economy... If demand for foreign exchange is decided by
demand for goods and services by a country the problem of unstable exchange
rate and depreciation might not be there because then the actual demand and
supply would determine the exchange rate and there would be less currency
manipulation to gain competitive depreciation and exports at the cost of
domestic demand and imports...
Remarkable
price-stability in Germany has made achieve competitive wages, too... Lower
borrowing cost has increased production/supply... Lower borrowing cost has also
increased competitiveness...
Germany and Netherlands
have much in common, low inflation and competitive wages... France and Britain
have high-inflation and increasing wages in common... At one end, we have
Germany and Netherlands as examples of internal devaluation, countries which
have gained competitiveness by cutting costs and increasing the real exchange
rate and at the most extreme the UK or Britain and France which have tried to
gain competitiveness by external devaluation or depreciation or by increasing
inflation and the nominal exchange rate... The countries that have used
internal devaluation seem more successful and have trade surplus... Whenever
they try to devalue, internal by some countries and external by others, the gap
between competitiveness increase double because at one hand we have lower
prices and higher real exchange rate and at other we have inflation and higher
nominal exchange rate... In internal devaluation prices are cut to decrease
cost and prices and increase competitiveness and in external devaluation
inflation cuts the real costs - real interest rate and real wages...
I'm talking about the
difference in nominal and real wages i.e. inflation adjusted wages...
Competitiveness means the scope to reduce costs, reduce prices and increase
demand and secure economies of scale as in the Perfect-Competition in which
price equals the marginal cost, lower prices also help achieve market share
which increases domestic-demand first and also external, and help lower
unemployment, and increase the economic-growth rate...
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