Question

To improve exports, should the dollar be valued high or low? Explain.

Answer 1

The dollar value shoud be low or it should decrease in order to improve exports.

By making a currency weaker there is a redistribution of purchasing power from those who hold

• the currency, in form of cash or
• assets, fixed income securities denominated in the currency

to anyone who holds

• a different currency against which it is going weaker
• or assets denominated in a different currency

Let me explain this with an example

Suppose India and US export the same quality bananas. Let us assume the cost to produce these bananas is same in both countries and both sell the bananas at cost price.

Price of 1 Banana in India :- Rs 800
Price of 1 Banana in US:- $80
1 Pound(GBP)= Rs 80
1 Pound(GBP) = $ 8 .
India sells this banana abroad at (800/80)=10 GBP
US sells this banana abroad at (80/8)=10 GBP

Now if the US devalues its currency by 10%
1 Pound (GBP)=Rs 80
1 Pound(GBP)=$ 8.8
Now India will sell the Banana at the same 10 GBP

but
US will sell the banana abroad at (80/8.8)=9.9 GBP

So Now people abroad will prefer American bananas since they are getting bananas at 0.1 pounds cheaper than India.

So Indians exports will go down and American exports will increase.

Now Indians will find American bananas cheaper so they will start importing them from US @ 0.9 Dollars which will be cheaper than Indian made bananas which will bring doom to Indian banana industry.

So US's export increases.

But this is just short term effect.

Market forces will try getting back into equilibrium ie as exports increase the currency value will increase.
Even then if US chooses to artificially forces its currency low, the currency of countries which are importing will start devaluing and the devaluation of the currency by US will become useless and it will have to devalue it again.

So a devaluation of the currency or valuing the dollar low would increase its exports in the short run but in long run the market forces of demand and supply would nullify the effect and the measure would not be successful in increasing exports in long run.

to anyone who holds

• a different currency against which it is going weaker or
• the assets denominated in a different currency