Which boosts a country's exports the most a weak strong or fluctuating currency?

Answer 1

Boosting ExportsA weaker currency boosts exports, since products produced in that country will be more competitive internationally. You can think of two ways a weaker currency can help:

If you consider selling the product for a fixed domestic price (eg $100), the foreign price will be lower and attract additional sales, boosting export revenues.

If you keep the foreign price fixed, then the product isn't any more competitive, but your take in domestic currency is greater (eg $120).

A stronger currency has precisely the opposite effect, which is why you often hear exporters complaining about the strength of the currency.

But while this seems straightforward, you can't say what is "good" or "bad" without also considering the effects on imports, as a weaker currency makes importing goods more expensive, contributes to inflation, and makes any foreign debt repayments more of a burden. A strong currency does the opposite.

A stable currency is generally good for trade, as it makes business more predictable, reduces risks and means that consumer prices can be kept stable.

Math

Let's use the USD and GBP as an example. The 1 USD = 0.64 GBP, which means the USD is weaker than the GBP. Due to the law of one price, a unit that cost 1 USD will cost 0.64 in GBP.

British Price = (GBP/USD) x US Price + Transportation Cost

Current Price;

£6.4 = (0.64 GBP/1 USD) x $10

Weaker Dollar;

£5.4 = (0.54 GBP/1 USD) x $10

Therefore US exports increase due to a weaker exchange.

You could also flip it around to figure out the impact on US imports.

Current Price;

$15.63 = (0.64 GBP/1 USD) x £10

Weaker Dollar;

$18.52 = (0.54 GBP/1 USD) x £10

Therefore US imports would decrease due to a weaker exchange.