Anybody know why devaluation helps exports?

[EdwardBaiamonte]

You hear this all the time. Now they say for example that if Greece exits they can devalue their currency to boost exports and their economy. Does that make sense to anyone?

 

[cnm]

Are you serious?

Reducing the value of a currency make goods priced in that currency cheaper when purchased with other currencies. It gives a competitive advantage.

For instance a litre of olive oil that sold for 10 drachma say, (I've absolutely no idea of the value of the drachma or the price of olive oil in Greece), might have been purchased for $10 US if the currencies were at parity.

If the drachma is devalued to $0.90 US then Greek olive oil is selling at a 10% discount compared to its competitors' product, whose currencies have not been devalued, and can be purchased for $9.00 US, hopefully leading to increased sales.

Meanwhile wages etc in Greece are still paid in Drachma though the Drachma price of imports will increase.

Devaluing can also affect debt repayments in some circumstances, to the disadvantage of creditors.

 

[EdwardBaiamonte]

Are you serious?
Reducing the value of a currency make goods priced in that currency cheaper when purchased with other currencies. It gives a competitive advantage.

1) if that was true we should all devalue our currency all the time

2) if true the Greek guy gets less euros and so can import less

3) if true the Greek guy can just lower his price and move the same amount of oil, and keep the Euro as currency.

4) wages would go down in Greece to correspond to the reduced value of the countries GDP

On balance it seems like it is a neutral move in a technical economic sense but a huge loss given the huge emotional and administrative burden.

 

[cnm]

Oh. Well I suppose none of my post can be true then. My own fault for responding.

Greece cannot devalue the Euro, that is one of the major points. It could only devalue the Drachma, if it adopted it.

 

[EdwardBaiamonte]

Oh. Well I suppose none of my post can be true then.

I agree. Live and learn. I mean what a free lunch that would be!! No new inventions just currency devaluation and off you go.

 

[Staidhup]

Currency devaluations serve no worthwhile purpose to the consumer, importer, exporter. The key word is elasticity and its effect on the economy.

 

[EdwardBaiamonte]

Currency devaluations serve no worthwhile purpose to the consumer, importer, exporter. The key word is elasticity and its effect on the economy.

1) so why do so many recommend it.

2) If elasticity matters it matters before the devaluation too allowing folks to raise or lower prices then too.

 

[cnm]

I agree. Live and learn. I mean what a free lunch that would be!! No new inventions just currency devaluation and off you go.

As I said, my fault for responding.

 

[oldfart]

Are you serious?
Reducing the value of a currency make goods priced in that currency cheaper when purchased with other currencies. It gives a competitive advantage.

First, congratulations Ed for a good OP and a good effort to keep it on track!

1) if that was true we should all devalue our currency all the time

If all trading partners devalued by the same amount at the same time, the effects would mostly net out. When one country devalues, there is a risk others will follow suit to protect themselves, and the ensuing food fight is called a "currency war". This supposes that all international debts are denominated in the domestic currency. If international debt to international organizations and foreign governments, banks, and firms are denominated in another currency (or gold), devaluation is ineffective. Greece, for example, cannot devalue as long as it is on the Euro.

2) if true the Greek guy gets less euros and so can import less

Precisely correct. Devaluation is a scissors, it increases exports and depresses imports, moving the trade balance favorably and increasing aggregate demand, stimulating the economy. On the drachma, tourists would find that their Euros would buy more drachmas, and thus lower the cost of local lodging and meals, increasing tourism. The restaurants they frequent would find the cost of imported vodka to be higher, so they would push domestic ouzo. More tourism, more ouzo, more employment.

3) if true the Greek guy can just lower his price and move the same amount of oil, and keep the Euro as currency.

This is called "internal devaluation." It's hard because prices and wages tend to be sticky downward. Farmers might find that lower prices force them to dump olive oil at below cost (in the Depression the same thing led for farmers dumping milk in the streets in a lot of countries including the USA). It takes a long time to work, generally does not succeed, and causes massive economic and social unrest. But that's exactly what Germany is pushing for in Greece and the rest of southern and eastern Europe.

4) wages would go down in Greece to correspond to the reduced value of the countries GDP

Lots of luck with that. Governments that try to reduce nominal wages don't last long, and those that force the reductions end up with larger budget deficits, soaring unemployment, and severely negative growth.

On balance it seems like it is a neutral move in a technical economic sense but a huge loss given the huge emotional and administrative burden.

The only thing that makes currency devaluation look good is internal devaluation. The solution is to have the creditor economies participate in the adjustments; we cannot have every country run a positive export surplus.