Global Economics: The Benefits of having a Strong Currency

1 Economics: The Benefits of Having a Strong Currency Countries are justified to express their concerns when China artificially devalues its currency. The concern that devaluation puts an automatic discount on Chinese-produced goods gives Chinese producers an advantage in international markets. The paper considers the effect an artificially low exchange rate has on both China and the countries it trades with. There is a need to discuss the benefits to a country of having a strong currency.

Devaluation of China’s currency will lead to higher aggregate demand and exports, leading to higher rates of economic growth. The higher level of exports is supposed to lead to an improvement in the current account deficit. As mentioned earlier, the exports will also become cheaper and more competitive for foreign buyers. This will boost domestic demand and may lead to the creation of jobs in the export sector. If China loses competitiveness in a fixed exchange rate, devaluation is likely to be beneficial in solving the decline in competitiveness (Bénétrix, Lane & Shambaugh, 2015).

Strong currencies are advantageous because they lower the cost of imported goods, hence enabling lower prices for the consumers. Even the exporters import materials to make their products to pay less for those materials.

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2 There are also low funding costs for governments. Courtesy of a strengthening currency, the flows from outside the country may sometimes go into the local government bonds (Bénétrix, Lane & Shambaugh, 2015). Such a flow may lower the yields and enable the country with a strong currency to raise money at cheaper rates in the markets. Finally, a stronger currency instills a sense of wealth in the sense that citizens of a country with a strong currency will find it cheaper to take vacations in foreign countries, hence improving their quality of life.

3 Reference Bénétrix, A.S., Lane, P.R., & Shambaugh, J.C. (2015). International currency exposures, valuation effects, and the global financial crisis. Journal of International Economics, 96, S98-S109.