Implications of Weak Currency and the Fixed and Floating Exchange Rate System

Economics Essay 3
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What are the implications of a weaker currency for a country?
A weaker currency is often translated to mean a weaker economy. However, this is not true, and some countries weaken their currency for certain reasons. One of the main reasons a country can devalue its currency, such that it is weaker against other currencies, is to boost exports. If the currency is weak, the cost of production is relatively lower, and hence the exports are cheaper. Weaker currencies favor major exporters countries since their goods can be competitive in the global market (Siripurapu, 2020). Local companies can compete favorably in the international market if they produce goods in a country with a weaker currency. For example, in Japan, a large export economy of finished goods, i.e., cars, devalued its currency, weakening it against other currencies to boost exports (Boykoff, 2013). Following the move, goods produced in Japan became relatively cheaper globally and increased their demand. Japan aimed to revive its economy following hard economic times that had rocked the highly export economy since World War II.
On the other hand, the imports of the countries with weak currency tend to be more expensive. This is because the goods were produced in an economy with strong currency; hence the factors of production were higher. A strong currency favors imports. Because of the strong currency, imports are relatively cheaper. A strong dollar favors countries heavily dependent on imports as their currency’s relative strength makes imported goods cheaper. Local manufacturers in a country with a strong currency are disadvantaged in the international market as their products are relatively more expensive than those produced in countries with weaker currency. The strong local currency is an advantage to importers than it is for exporters.
The strength of a currency has several implications on the citizens of the country. Firstly, a strong currency makes imports cheaper and hence reduces inflation. Imported goods become relatively cheaper, which reduces the cost of living and inflation. Secondly, a strong dollar makes local companies more competitive in the global market. This may lead some companies to move out of the country to countries with a weaker dollar to ensure that their products remain competitively priced in the market. This is the main reason why most United States products are pricier than Chinese-made goods. Similarly, a strong dollar makes imports more affordable. If goods are produced in a country with a weaker currency, then factors of production are cheaper. Some countries have devalued their currency to attract investors as the cost of production in the country is likely to go down.
Which is better, a fixed-exchange-rate system or a floating exchange-rate system? Explain.
Floating exchange rate regimes are markets where market forces determine rates. The values fluctuate with market conditions. On the other hand, for fixed exchange rate regimes, the central bank is dedicated to maintainin...