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How does a weaker currency actually lead to stronger exports?

Updated: Nov 18, 2019


Suppose you are a T-shirt manufacturer in India and sell your T-shirt at 500 Rs./T-shirt. Your friend Sam is also a T-shirt manufacturer in the US and sells his T-Shirt at $10/ T-shirt.

Assumed Current forex rate : 1$ = 50 Rs.

Now case 1: if Rupee depreciates. and slides to 55 Rs /dollar then:

  • Your T-shirt which you used to export at $10 will now be sold at $9.09 ( 500/55) in US and there will be more demand for your T-shirt and you will export more and more T-shirts. More production > More earnings > More jobs > economic stability Result: Export Boosts

  • But, at the same time import will be very costly and will be hampered as Indians has to pay 550 Rs. to import the T-shirt from Sam who is an exporter in US because for the same T-shirt which you used to buy at 500 Rs. will now be bought at 550 Rs. Fewer imports > More Exports > Indian will have a trade surplus Result: Import hampered.

Now case 2: if Rupee appreciates. and surges to 45 Rs /dollar then:

  • Your T-shirt which you used to export at $10 will now be sold at $11.11 ( 500/45) in US and because of the high cost there will be less demand for your T-shirt and you would be able to sell (Export) fewer T-Shirts. Less production > Less earnings > Less jobs > unstable economy Result: Export hampered.

  • But, at the same time import will be stimulated as Indians has to pay 450 Rs. to import the T-shirt from Sam who is an exporter in the US because for the same T-shirt which you used to buy at 500 Rs. will now be bought at 450 Rs. More imports > unbalanced BOP > India will have Trade Deficit Result: Import Stimulated (In both the case I ignored shipping and other transaction costs such as import duties for the moment.) So, it's simple now and we have seen how a week currency boosts the country’s export. simple right? but the economy is a bit complex than you think it is. Let me explain why? Whenever you go to a supermarket to buy a Shampoo. You have options like Patanjali, Wipro, Swantik, Ayur Herbal, Keshnikhar, Vatika, Nile, Levander, Godrej etc but you are more likely to buy Head & Shoulders, Lux, Clinic, Sunsilk, Revlon, Lakme. why? because you have to see your budget too and have to buy the best of the best shampoo. In head and shoulders, you are getting popular world brand at lesser cost and it sounds nice too ( rather than saying Ayur, Swantik) isn’t it? So just like you, there are millions of people who prefer to buy this shampoo and India have no choice but to import more and more head and shoulder.so even your currency is weak ( say 55 Rs/ dollar) you have to give more money abroad just to fulfill your need.

In this case what actually happening is despite weaker currency India imports more than it exports and there will be trade deficit and BOP will be negative which is not good for the country and India may face the following issues.

  • Unemployment: If imports are much more in demand than exports, domestic jobs may be lost to those abroad.

  • Currency Value: Fewer exports means less demand for Rupee in other countries. American companies selling goods abroad must convert those foreign currencies back into dollars in order to pay their workers and suppliers, bidding up the price of their home currency. As the demand for exports falls compared to imports, the value of a currency should decline

  • Interest Rates: A downward pressure on a country's currency devalues it, making the prices of goods denominated in that currency more expensive; in other words, it can lead to inflation.

  • Foreign Direct Investment: By definition, the balance of payments must always net out to zero. As a result, a trade deficit must be offset by a surplus in the country's capital and current account. This means that deficit nations experience a greater degree of foreign direct investment and foreign ownership of government debt.

I hope you understood why our Prime Minister emphasizes more on this black lion.



Note : Trade deficit doesn’t always affect negativity for a country as far as Importer country is making productive use of imports like machinery and equipment which actually leads to better growth of the country and lets us use better technologies to resolve day to day issues. In 2016, U.S. exports were $2.2 trillion and imports were $2.7 trillion. The trade deficit was approximately $500 billion – the United States imported $500 billion more than it exported. Us ranked as one of the most stable economies of the world.

Akshay Seth

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