Glamor Economics

Chapter 170

Chapter 21 Section 6 Economic instruments to regulate imports and exports - Currency depreciation

Sandixu Village is located on the sunny plains of northern Thailand. After the Asian financial crisis broke out more than 10 years ago, the villagers of the village began to print their own currency.At that time, due to a large amount of hot money flowing abroad, the Thai currency, the baht, depreciated sharply.In desperation, the local villagers tried to protect themselves by printing their own currency. The patterns on this counterfeit currency were buffaloes and temples drawn by local children.At the village market, many villagers use local currency to buy daily necessities such as fresh vegetables, pork, and fruits.And the scope of circulation of this currency is still expanding, and even the nearby rice mills have begun to accept this kind of money.

In fact, the direct cause of this phenomenon is the continuous depreciation of Thailand's legal currency, the baht, which makes local villagers unwilling to use their own currency.So, what is currency devaluation?

Currency depreciation is the symmetry of currency appreciation, which refers to the decline of the value contained in or represented by a unit of currency, that is, the price of a unit of currency decreases.From a domestic point of view, under the metal currency system, currency devaluation refers to measures to reduce the legal metal content of the national currency and reduce its relative price to metal to reduce the value of the national currency; under the modern paper currency system, currency depreciation refers to the When the quantity of banknotes exceeds the required money demand, that is, currency inflation, the value of banknotes decreases.From an international point of view, currency value is expressed as the ability to convert foreign currencies, which is specifically reflected in changes in exchange rates. At this time, currency depreciation refers to the reduction in the ability of a unit of domestic currency to exchange foreign currencies, and the decline in the exchange rate of domestic currency against foreign currencies.

For example, if USD 100 was exchanged for RMB 300 last year and RMB 400 this year, the RMB has depreciated.Currency depreciation causes domestic prices to rise.However, under certain conditions, currency depreciation can stimulate production and reduce the price of domestic goods abroad, which is conducive to expanding exports and reducing imports. Therefore, after the Second World War, many countries took it as a way to counter economic crises and stimulate economic development. means.

In fact, when a currency depreciates sharply, can it really achieve the expected goal, and can the depreciation promote the increase of exports and the improvement of the economy?I'm afraid the answer may not be in the affirmative.Effective depreciation is based on the assumption that there are two countries and two currencies, that is, only the home country and foreign countries, the home currency and the foreign currency, and the depreciation of the home currency is the appreciation of the foreign currency.The reality is that there are currently more than 200 economies in the world. For the sake of sovereignty, almost every economy has its own currency. Therefore, a currency is not facing one foreign currency but multiple foreign currencies.Foreign is also a collective concept. The foreign of one country is also the foreign of other countries. Each country faces a common rather than divided international market. Moreover, the export market is not unlimited but limited.Importing countries will also set up many import restrictions.There are not only trade partnerships among countries, but also export competition.

For the sake of simplicity, it is assumed that in the international market of a commodity, only two suppliers, i.e. exporting countries a and b, are in the export competition relationship, and other countries are all demand countries, i.e. importing countries, and a and b each account for 50% of the market share. Country a has a deficit in the balance of payments. In order to improve its deficit, it adopts a currency depreciation policy. The currency depreciation of country a is effective and increases exports, and the enlarged share is exactly the lost share of country b. Country b is not reconciled to the reduction of its share, and also adopts depreciation measures to regain the lost share.As a result, round after round of vicious depreciation competition began, forming a "devaluation trap".

First of all, from the point of view of a single country, each round of currency depreciation of countries a and b is effective. In the first round of devaluation, the currency of country a depreciates by 10%, the market share increases from 50% to 75%, and the export demand is elastic. 2.5 (2.5=25%/10%), the devaluation of country b is also effective. After the depreciation of country b’s currency by 10%, the market share recovers from the remaining 25% to 50%, and the elasticity is also 2.5. The second round of devaluation also has Elastic, yet equally effective, so it can be repeated over and over again.

Second, on the whole, depreciation is ineffective.After two or more rounds of depreciation, the market share has returned to the initial state, still 50% to 50%.A further conclusion is that such depreciation is ineffective in improving a country's balance of payments. It will actually worsen a country's balance of payments and, through a cascading effect, worsen the balance of payments of all competing countries participating in vicious depreciation.After two rounds of depreciation, the exchange rate of the two currencies depreciated by 19% (19%=100%-90%×90%) compared with the initial period, but the market share remained unchanged, that is, the export volume remained unchanged, which means that the two currencies Export earnings fell by 19% in each country.This phenomenon that depreciation is effective from a single point of view but invalid from an overall point of view can be called a depreciation trap.

The depreciation trap is a vicious circle, because every round of depreciation seems to have obvious effects, which stimulates the preference of countries to use currency devaluation policies to solve the balance of payments problem, and blames the insignificant effect on insufficient depreciation, thus further substantially depreciated.However, the result of this currency depreciation is to worsen the balance of payments situation, which is ineffective and brings other countries into the quagmire of balance of payments imbalance.

In actual international trade, the devaluation of a certain country's currency may also trigger a chain depreciation of the currencies of neighboring countries.If so, this would lead to a turnaround in the terms of trade of developing countries, not only failing to stimulate their own exports, but instead subsidizing domestic resources to foreign consumers.Even if depreciation can produce short-term effects, but for long-term effects, it is undoubtedly pouring cold water.In addition, currency depreciation will stimulate capital outflows. Once foreign capital forms expectations of currency depreciation, it will flow out on a large scale, which will lead to more turmoil in the capital market and is not conducive to economic stability.

[links to related words]

Currency depreciation, also known as currency devaluation, is the symmetry of currency appreciation, which refers to the decline in the value contained in or represented by a unit of currency.

(End of this chapter)