<p>So going off of my comments, there's no reason to believe that just price or just quantity sold have to remain the same; when you change price, you end up moving along the demand curve.</p>

<p>A country may indeed only import what it "needs," but if the item in question is a unit of production, and the price of it effectively falls, then that lowers the marginal cost of production for any firms who want to import that good, so that will allow them to demand more of the good. If the item in question is a final good and preferences are monotonic and locally non-satiated, then a lower price would mean more people would want to import the good if the price fell. Selling more product could lead to a higher profit if $q'p' - c(q') &gt; qp - c(q)$, where the primes indicate new quantity and new price, and cost is a function of quantity.</p>

<p>In the case where the benefit of a good does cap out completely, and firms/consumers in a country really don't want more of the good, then a country doesn't benefit in respect to that good when they devalue the currency, but you'll be hard pressed to find examples of that.</p>

CC BY-SA 3.0
2015-12-24T15:26:32.780Z
Shouldn't you also mention that this benefit is not offset by the cheaper price i.e. that China in my example will actually benefit from the increased demand more than it will lose because of the cheaper price?
SpaceMonkey
CC BY-SA 3.0
2015-12-24T15:37:55.137Z
It may or may not, that's the thing. I'll edit the answer to clarify.
Kitsune Cavalry
CC BY-SA 3.0
2015-12-24T15:23:47.617Z
2015-12-24T15:40:22.780Z
2015-12-24T15:40:22.780Z
Kitsune Cavalry
<p>The problem lies with your assumptions. Practical world trade doesn't usually work that way. No one ever devalues their currency by half. </p>

<p>This would be a practical assumption:</p>

<p>US buys toys from China - say x units. It also buy toys from Japan - say y units. </p>

<p>Chinese toys cost xx, and Japanese toys cost yy.</p>

<p>Now, the US would start buying more from China (say x + a), by substituting Japanese toys ( now the US buys y - b) with Chinese toys. (The US would never import more without substituting because it won't import more than what it needs, as pointed out by someone else here)</p>

<p>If production is China had slowed down before devaluation, this would result in more production. More jobs, more income for employees. A devaluation is done to boost exports, resulting in more production, resulting in more employment, resulting in an overall increase in <strong>economic activity</strong>, whether or not it results in a direct increase in the income received through exports (although it usually does)</p>

CC BY-SA 3.0
2015-12-24T14:39:56.883Z
Are you saying that the US will now pay more than the 100$ by substituting from what they were paying to Japan?
SpaceMonkey
CC BY-SA 3.0
2015-12-25T19:02:03.257Z
No, why do they have to pay more? If Chinese goods cost lesser than Japanese goods, the US would simply substitute whatever Japanese good they can with Chinese ones.
WorldGov
CC BY-SA 3.0
2015-12-25T19:02:46.153Z
I would suggest that you also read up on 'currency wars' - it might be useful
WorldGov
CC BY-SA 3.0
2015-12-25T19:04:00.637Z
Mate, yes. I meant that they would pay more TO CHINA and less to Japan, so their total is still the same.
SpaceMonkey
CC BY-SA 3.0
2015-12-24T14:32:20.120Z
2015-12-24T14:32:20.120Z
WorldGov
<p>I have the typical answer:</p>

<p>"A cheaper currency means exports will go up because it's cheaper to buy from us!"</p>

<p>Yeah, sure, but that's obviously full of holes.</p>

<p>Let's have a simple situation:</p>

<ul>
<li>We have China (yuan) and America (\$).</li>
<li>America needs 100 "item" from China every year.</li>
<li>One "item" costs 1 yuan.</li>
</ul>

<p>Now, let's say currently (situation A):</p>

<ul>
<li>The rate is 1\$:1yuan</li>
<li>That means America pays \$100 every year.</li>
</ul>

<p>In situation B, we devalue the Yuan:</p>

<ul>
<li>The rate is 1\$:2yuan</li>
<li>That means America now does one of the following:

<ul>
<li>Only pays 50\$ and still gets the same 100 items.

<ul>
<li>China basically just lost 50\$ a year. China loses.</li>
</ul></li>
<li>Still pays 100$ but now gets 200 items instead:

<ul>
<li>China gets the same 100\$ but is now giving out 200 items instead. China loses.</li>
</ul></li>
</ul></li>
</ul>

<p>So, how exactly would China ever benefit from devaluing its currency? It doesn't make any sense to me, you're literally just giving more exports, you are not getting anything more in return.</p>

<p>The only reason I could think of, is that they actually do think that, in order to stay competitive, they need to sell 2 items for 1$ instead of only 1 i.e. they do think it should be that cheap and they don't want the floating currency price to interfere with what they think should be the correct price for their products.</p>

CC BY-SA 3.0
2015-12-24T14:29:37.243Z
You're setting up a false dichotomy. What's to say America won't buy more than 100 dollars worth of goods at this point? That would be the point of devaluing the currency (although usually not by such a huge margin).
Kitsune Cavalry
CC BY-SA 3.0
2015-12-24T14:30:49.720Z
so you're saying that the cheap rate would encourage America to buy more than just 100$ worth?
SpaceMonkey
CC BY-SA 3.0
2015-12-24T14:32:07.070Z
Also, I said that because I supposed a country would import only what it needs, why import more than you need.
SpaceMonkey
CC BY-SA 3.0
2015-12-24T14:53:47.097Z
You import what you need *at a given price*. If things become cheaper, you might need more since either you will gain more utility, or if it is an input of production, your marginal costs will fall, and you want to produce where marginal cost equals marginal benefit.
Kitsune Cavalry
CC BY-SA 3.0
2015-12-24T14:57:11.413Z
ok, so the US may actually pay more than the 100$ when the price falls. Correct? Now China actually gets more dollars, but isn't that being offset by the fact that they are selling for less?
SpaceMonkey
CC BY-SA 3.0
2015-12-24T15:12:06.387Z
That's why I hold my reservations in this case where the devaluation is so strong. Nevertheless, if China felt they were going to sell a lot more product, even at a cheaper price, they could possibly get more profit, but they'd have to sell a lot more in your example.
Kitsune Cavalry
CC BY-SA 3.0
2015-12-27T12:03:46.427Z
You're saying China loses because they get less dollars, but dollars isn't the only thing China wants. They also want yuans for internal use, like wages. So even if America uses the same amount of dollars, Chinese workers get more yuans for domestic goods.
oyvind
CC BY-SA 3.0
2015-12-27T15:36:52.320Z
@oyvind What's the point of getting paid in your own currency? Isn't that 100% inflation? They might as well just print some more yuans and save the goods for themselves.
SpaceMonkey
CC BY-SA 3.0
2015-12-27T18:37:25.927Z
@oyvind wait, I forgot one thing. Paying China in its own currency is effectively China paying back its debt to yuan holders (US in this case). So, it isn't the same as just printing money as I said earlier. However, your point is still wrong because China isn't benefiting by getting yuan, it would be just paying back its debt that it had to pay off at some point anyway.
SpaceMonkey
<currency><exchange-rates>
Why is devaluing your currency good for exports?
SpaceMonkey
# Why is devaluing your currency good for exports?

(Asked by: username_0 on 2015-12-24)

I have the typical answer:

"A cheaper currency means exports will go up because it's cheaper to buy from us!"

Yeah, sure, but that's obviously full of holes.

Let's have a simple situation:

* We have China (yuan) and America (\$).
* America needs 100 "item" from China every year.
* One "item" costs 1 yuan.

Now, let's say currently (situation A):

* The rate is 1\$:1yuan
* That means America pays \$100 every year.

In situation B, we devalue the Yuan:

* The rate is 1\$:2yuan
* That means America now does one of the following:
  + Only pays 50\$ and still gets the same 100 items.
    - China basically just lost 50\$ a year. China loses.
  + Still pays 100$ but now gets 200 items instead:
    - China gets the same 100\$ but is now giving out 200 items instead. China loses.

So, how exactly would China ever benefit from devaluing its currency? It doesn't make any sense to me, you're literally just giving more exports, you are not getting anything more in return.

The only reason I could think of, is that they actually do think that, in order to stay competitive, they need to sell 2 items for 1$ instead of only 1 i.e. they do think it should be that cheap and they don't want the floating currency price to interfere with what they think should be the correct price for their products.

**Tags:** currency, exchange-rates

> **Comments:**
> **username_1**: You're setting up a false dichotomy. What's to say America won't buy more than 100 dollars worth of goods at this point? That would be the point of devaluing the currency (although usually not by such a huge margin).  
> **username_0**: so you're saying that the cheap rate would encourage America to buy more than just 100$ worth?  
> **username_0**: Also, I said that because I supposed a country would import only what it needs, why import more than you need.  
> **username_1**: You import what you need *at a given price*. If things become cheaper, you might need more since either you will gain more utility, or if it is an input of production, your marginal costs will fall, and you want to produce where marginal cost equals marginal benefit.  
> **username_0**: ok, so the US may actually pay more than the 100$ when the price falls. Correct? Now China actually gets more dollars, but isn't that being offset by the fact that they are selling for less?  
> **username_1**: That's why I hold my reservations in this case where the devaluation is so strong. Nevertheless, if China felt they were going to sell a lot more product, even at a cheaper price, they could possibly get more profit, but they'd have to sell a lot more in your example.  
> **username_2**: You're saying China loses because they get less dollars, but dollars isn't the only thing China wants. They also want yuans for internal use, like wages. So even if America uses the same amount of dollars, Chinese workers get more yuans for domestic goods.  
> **username_0**: @username_2 What's the point of getting paid in your own currency? Isn't that 100% inflation? They might as well just print some more yuans and save the goods for themselves.  
> **username_0**: @username_2 wait, I forgot one thing. Paying China in its own currency is effectively China paying back its debt to yuan holders (US in this case). So, it isn't the same as just printing money as I said earlier. However, your point is still wrong because China isn't benefiting by getting yuan, it would be just paying back its debt that it had to pay off at some point anyway.  

---

## 2 answers

### Answer by username_1 on 2015-12-24. Score: 1 | Accepted answer

So going off of my comments, there's no reason to believe that just price or just quantity sold have to remain the same; when you change price, you end up moving along the demand curve.

A country may indeed only import what it "needs," but if the item in question is a unit of production, and the price of it effectively falls, then that lowers the marginal cost of production for any firms who want to import that good, so that will allow them to demand more of the good. If the item in question is a final good and preferences are monotonic and locally non-satiated, then a lower price would mean more people would want to import the good if the price fell. Selling more product could lead to a higher profit if $q'p' - c(q') > qp - c(q)$, where the primes indicate new quantity and new price, and cost is a function of quantity.

In the case where the benefit of a good does cap out completely, and firms/consumers in a country really don't want more of the good, then a country doesn't benefit in respect to that good when they devalue the currency, but you'll be hard pressed to find examples of that.

> **Comments:**
> **username_0**: Shouldn't you also mention that this benefit is not offset by the cheaper price i.e. that China in my example will actually benefit from the increased demand more than it will lose because of the cheaper price?  
> **username_1**: It may or may not, that's the thing. I'll edit the answer to clarify.  

---

### Answer by username_3 on 2015-12-24. Score: 1

The problem lies with your assumptions. Practical world trade doesn't usually work that way. No one ever devalues their currency by half.

This would be a practical assumption:

US buys toys from China - say x units. It also buy toys from Japan - say y units.

Chinese toys cost xx, and Japanese toys cost yy.

Now, the US would start buying more from China (say x + a), by substituting Japanese toys ( now the US buys y - b) with Chinese toys. (The US would never import more without substituting because it won't import more than what it needs, as pointed out by someone else here)

If production is China had slowed down before devaluation, this would result in more production. More jobs, more income for employees. A devaluation is done to boost exports, resulting in more production, resulting in more employment, resulting in an overall increase in **economic activity**, whether or not it results in a direct increase in the income received through exports (although it usually does)

> **Comments:**
> **username_0**: Are you saying that the US will now pay more than the 100$ by substituting from what they were paying to Japan?  
> **username_3**: No, why do they have to pay more? If Chinese goods cost lesser than Japanese goods, the US would simply substitute whatever Japanese good they can with Chinese ones.  
> **username_3**: I would suggest that you also read up on 'currency wars' - it might be useful  
> **username_0**: Mate, yes. I meant that they would pay more TO CHINA and less to Japan, so their total is still the same.  

---

