This economics question

[Banedon]

So all the articles on the newspapers claim that China undervalues its currency, which somehow give Chinese goods a trade advantage.

I don't get how that is possible. If the renminbi is undervalued, then all the prices go up, naturally, and nothing changes. How is it possible any other way else? Suppose right now China issues a decree whereby the renminbi is now worth 10% of what it currently is worth, thereby undervaluing it even more. Clearly the immediate consequence is that people hoarding renminbi are suddenly poorer than before, which isn't relevant to Chinese trade at all. Everyone can still buy Chinese products with (say) US$ converted into renminbi. People holding foreign currency can convert into renminbi and become millionaires in China, able to buy lots of things ... wherupon the prices in China must go up, because demand is now higher than supply. A natural place to stop would be a 1000% mark-up in prices, where something that used to be 100 renminbi now costs 1000 renminbi, the same value. Which doesn't change anything. Logically you can remove inflation by issuing new currency and declaring that all old currency is now worth 10% of the new one, and that all prices in the country be decreased by 90%.

Where is the trade advantage? An advantage arises only if China could somehow persuade customers to choose their exports. The obvious way to do that is to have the exports be cheap. But China cannot control the prices - not for long, anyway. For production to be profitable, a product must sell for more than it costs to make. If you have an artificially cheap export, then you also have artificially low profits. If you have artificially low profits, and you're willing to live with them, then you've outcompeted your rivals in the market. But this has nothing to do with undervaluing the currency ...

Can anyone explain to me how undervaluing the currency grants the country that does it a trade advantage?

[ThunderTitan]

It's because good are cheaper in China then everywhere else, so more companies will buy from China... that's why everything you own has "Made in China"on it.

It's like when the dollar went down compared to the euro... people making money in euros could all of a sudden buy more stuff from the US at cheaper prices for them... while their own financial situation was the same.

People holding foreign currency can convert into renminbi and become millionaires in China, able to buy lots of things ... whereupon the prices in China must go up, because demand is now higher than supply.

That's the wonder of an authoritarian regime... prices can stay the same if they say so.

But i think the main thing is that they're actually not converting them into renmimbi, but buying stuff with dollars or euros... which don't really affect the street prices, but do affect the wealth China has... or something like that.


Note to self, never become a teacher, you suck at explaining stuff.

[Banedon]

It's like when the dollar went down compared to the euro... people making money in euros could all of a sudden buy more stuff from the US at cheaper prices for them... while their own financial situation was the same.

Well but if the dollar goes down compared to the euro, US goods would get more expensive (in terms of dollars), right?

[Mirez]

It'd be equal, how much the dollar is worth compared to other currency isn't important when you get payed in dollars and you buy stuff in dollars.

[Tress]

It might not be entirely accurate but undervaluing currency is somewhat codename for cutting wages(since local stuff will eventually cost more and ability to buy will fall) and artifically lowering material costs(that will eventually be leveled due to inflation), thus allowing to produce good for export at less expense and give it trade advantage.

[ThunderTitan]

Well but if the dollar goes down compared to the euro, US goods would get more expensive (in terms of dollars), right?

Depends on why it went down. And the economic policy i guess (right now they should be trying to drive prices down to encourage consumption imo).


An easier to understand example would be the other way around... the Euro going up while the dollar would be unchanged... wages in the euro zone wouldn't go down, thus everyone from the euro-zone could buy more stuff from the US.

[Banedon]

Yeah but then eventually the price of US goods would go up, right? Which would disadvantage the people who earn money in dollars.

Also if artificially depreciating your currency gives you advantages, why don't every country in the world do it? All the government has to do is increase the interest rate and print lots of money right?

[ThunderTitan]

Because if everyone did it there'd be no actual advantage, and printing money = inflation, while the situation you brought up is more about not allowing the currency to appreciate as much as it should.

Yeah but then eventually the price of US goods would go up, right? Which would disadvantage the people who earn money in dollars.

Well the internal market would still be working under the same value for the currency... and that's what you seem to be thinking of when you try to make sense of the question in your head... international trade is more complex, even if you only take into account the different currencies.

But yes, eventually the good would appreciate even if only because off all the extra exports bringing in all that money...

But the idea is that that would take a while, and as noted above, bring in moar moneyz along the way...

[jeff]

Yeah but then eventually the price of US goods would go up, right? Which would disadvantage the people who earn money in dollars.

No in fact using the US dollar as an example, when the currency is devalued there is an advantage for the homemade items as they stay essentially the same price in dollars. Imports go up since the exchange rate buys less foreign currency; giving a competitive advantage in this case to US made products. US products bought overseas may be paid for in dollars, but the companies exchange currency so the Euro would get more dollars in exchange thereby lowering the US made item’s cost in Europe, but the European equivalent is now at a disadvantage since its Euro price is unchanged.

[ThunderTitan]

Actually jeff, Banedon isn't wrong, it's just that he's mistaken about the time period involved.

And actually China is a great example of a country getting a stronger economy from exporting stuff, which is why their currency should have gone up more then they allowed it to... they're basically trying to extend the period in which they get the advantage of having cheaper goods to export.

[ThunderTitan]

Look, even the BBC is getting in on this: http://www.bbc.co.uk/news/business-11722578

[Banedon]

Because if everyone did it there'd be no actual advantage, and printing money = inflation, while the situation you brought up is more about not allowing the currency to appreciate as much as it should.

Different solution then ... let the US decree that from now on one US dollar is worth 0.001 Euros, and suddenly the US would've artificially depreciated their currency right?

I just don't see how if it's advantageous, countries don't just do it. It's something within their power after all, and as far as I know there're no laws against it.

[ThunderTitan]

Nah, that won't work for the same reason why cutting everyone's salary by 50% doesn't, but simply not raising their salary as much as you should so that you end up paying them only 50% of what you should does.

EDIT: Oh and i forgot to mention that most people see to think that China is actually stockpiling foreign currency... so the effect of the exports on their own currency would be even lesser...

[ThunderTitan]

Banedon, just look at Steam and actually even most boxed games that are being sold at release... it's cheaper for me to buy them from the US because for some reason they're all 50€ instead of being the equivalent of 50$. And US prices aren't actually affected.

It's the small differences like that making all the difference...

[ThunderTitan]

Look, more stuff about it:

Japanese auto manufacturer Honda has reported a 40% drop in third-quarter profits after overseas sales were hit by the strong yen.

Honda generated net profits of 81.1bn yen ($989m; £623m), down from 134.6bn yen the year before.

The firm also blamed poor sales in Japan, which have been hit by the end of government incentives to encourage more people to buy green cars.

However, Honda raised its full-year net profit forecast to 530bn yen.

The carmaker believes that a recovery in the US car market should boost sales.

Honda also said the growing sales in emerging markets during the third quarter helped it to offset the loss of revenue from more mature markets.

And i bet the Yen only went up by 0, something...

[Kalah]

Is anyone else participating in this discussion, or are you just talking to yourself as usual?

[ThunderTitan]

Well i'm certain that Banedon will come back one day... unless the grues eat him first.

[Banedon]

OK TT new and completely different question.

So now Greece has no money and needs the EU to bail them out ... does that mean if a war starts and the international community does not help, Greece cannot defend itself? After all:

1. They have no money;
2. They still can't borrow money because the chances of them borrowing back any massive wartime spending they have to make is even less than it is now.
3. They can't feed their soldiers even if all their citizens volunteer to fight for them and they have the best weapons in the world.

I'm sure there's patriotism and all that that'll come into play, but without international help (i.e. money) they just don't have money ... right?

[ShadowLiberal]

A few problems with your hypothetical Banedon.

1) Who's going to invade Greece? Russia? They have no need to, nor does anyone else. Plus it would be cheaper to just buy any resources Greece has that they wanted.

2) The one thing that big governments can always find more money for is the military.

3) Is Greece a member of NATO? If so then there's another reason why they don't need to worry about the unlikely event of a military invasion.

[Kalah]

Without going into politics (which is better suited for a different forum), I hope it all turns out more or less all right, given time.

We here in Norway are quite detached from the economic crisis; it's a bit difficult to imagine how people elsewhere have had their lives turned upside down the past couple of years ...