What are the advantages and disadvantages of having a low exchange rate?

Answer 1

Having a low exchange rate basically means that you can buy less foreign currency units with a single domestic currency unit. Thus your exports will become cheaper to foreigners since they can buy more of your currency with one unit of their currency. On the other hand your imports will become expensive since you'll have to pay more of your currency to buy their currency.

IOW : Assume things are like this 1.50$ for a euro. then you lower the exchange rate to this 1$ for a Euro. Note that now you can buy only 1 dollar with an euro while you were able to buy 1.50$ for an euro earlier.

Now if you want to buy an American can which is 3000$, earlier you had to pay only 20000 euros now you have to pay 3000 euros. Thus the price of imports have gone up and you will be discouraged to import.

If you look at it from the American side, assume you want to buy an European car. Earlier you had to pay have 4,500$ now you have to pay only 3000$. Thus European exports to American have become cheaper.

Therefore to conclude,

Advantage: Exports become cheaper thus the demand for exports rise, this will raise the trade revenue of a country. This will help balance the Balance of Payments account if you have a deficit.

Disadvantage : Imports become more expensive so you'll have to pay extra money for foreign goods. Hurting consumer choice and making products that may have good quality (and low prices) more expensive and thus hurting your living standards.

2. Also other countries may also lower their exchange rates in retaliation.