Let me ask you a question. What country do you live in? As a resident of that country, do you use the official currency of that country? Sure you do. If you had to choose between a strong currency or a weak currency, what would you choose? Well, let me first explain what I mean by a “strong currency” or a “weak currency”.
I’m not talking about a currency with physical strength or a lack thereof, but rather a currency that has a high value relative to other currencies. When a currency is strong, that means it is a currency that has a high value relative to other currencies. When a currency is weak, that means it is a currency that has a low value relative to other currencies. You see, the phrases “strong currency” and “weak currency” are nothing more that expressions used to illustrate valuation between each other.
So, back to the question I proposed to you earlier. If you had to choose between having a strong currency or a weak currency, what would you choose? I feel confident saying that you would have chosen the strong currency. Hey, if you didn’t and you chose a weak currency, then you are definitely a unique individual; because nine times out of ten, people would choose a strong currency.
But why is that? I want you to think about it. Having a strong currency does sound like a good thing because that means your currency is more valuable than currencies used in other countries. And that’s a good thing right? I’ll answer that with a… maybe.
In this article, I’m going to talk about how a strong currency affects an economy. I’m going to discuss the primary advantage and the primary disadvantage to having a strong currency. Yes, there is a disadvantage…sounds counterintuitive huh? So sit back, open your mind and be prepare to learn how a strong currency affects an economy.
Primary Advantage of Having a Strong Currency
There is really only one advantage to having a strong currency and that advantage isn’t usually felt buying goods and services where parts and components are obtained, manufactured and sold all in one country. It takes international trade and the use of different currencies to be able to feel the benefit. The primary benefit of a strong currency is to be able to get foreign goods and services at lower prices. That’s it.
If you own a clothing manufacturing company and you need fabrics from foreign producers, then a strong currency in the country your company resides in would be beneficial to you because it won’t take as much money to purchase what you need. That is made possible because your currency is more valuable. Anything you buy from a foreign country when your currency is strong will result in cheaper prices. That is the benefit.
Getting foreign goods and services at cheaper prices tends to influences domestic prices of goods and services. A strong currency can and does lower prices for domestic goods and services because many goods and services have parts and components that originate in foreign countries. If it costs a producer less money to create a good or a service, there is a chance that the producer will pass along the savings to the consumers.
Let’s say you wanted to buy a car in your country while your currency was strong, then that car would most likely be cheaper compared to when your currency wasn’t as strong because some of the parts used in the car, if not the entire car, originated from a foreign country. Just because it’s being sold in your country doesn’t mean it originated from your country. A strong currency benefits domestic consumers because in allows them to afford more foreign goods and services and my even help them afford more domestic goods and services.
Primary Disadvantage of Having a Strong Currency
With a strong currency, there is an advantage and disadvantage. I’ve stated the advantage above, but what about the disadvantage? The primary disadvantage of having a strong currency is foreigner consumers have to pay higher prices to purchase goods and services from your country. Having foreign consumers pay more for goods and services in your country may sound like a good thing, but in reality, it is not. When prices for goods and services increase, demand for those goods and services decrease. I recommend that you take a look at my explanation about supply and demand for more details.
When a country produces more goods and services and those goods and services are brought and consumed by consumers, the economy will grow. More sales equal more jobs. More jobs equals more people with more money due to employment. More people with money equals more spending. More spending equals even more jobs. That is economic growth – a cycle of increasing employment opportunities and an increasing production and consumption of goods and services.
Here’s the issue. When a country’s currency is strong, foreign demand for the countries goods and services will decline, resulting in less sales. A strong currency typically hurts domestic producers because it decreases the foreign demand for their goods and services. That will hurt economic growth, which of course is a very bad thing.
A Strong Currency and How it Affects an Economy
A strong currency can be the result of a central bank implementing or maintaining tight monetary policies. Tight monetary policies, also known as contractionary monetary polices remove money and credit from a economy’s money supply. That makes money more scarce and thus more valuable. A strong currency tends to benefit foreign economies and thus potentially negatively affect the domestic economy because it increases demand for foreign goods and services without necessarily increasing demand for goods and services domestically.
A strong currency would result in more domestic consumers purchasing more goods and services from foreign economies, helping to prop up sales and employment opportunities outside the domestic economy. With more consumer buying goods and services from foreign economies, demand for domestic goods and services could potentially decline, which would negatively affect sales and employment locally.
However, a strong currency could benefit the domestic economy because it makes foreign goods like energy and food more affordable for domestic consumers. If a country is a major importer of oil, then having a strong currency would benefit the domestic economy because oil will be more affordable for domestic consumers. With oil becoming more affordable, domestic consumers will have more money available for purchasing other domestic goods and services (that’s if domestic consumers decided to buy domestic goods and services and not foreign).
A strong currency can affect an economy in a variety of ways. It all depends on what the domestic consumers spend the currency on.
Here’s a recap. A strong currency always positively affects foreign economies because foreign goods and services become more affordable. A strong currency can negatively affect and or positively affect a domestic economy because demand may raise or fall for domestic goods and services.
It all depends on how strong the currency is. If foreign demand for domestic goods and services falls too greatly, and if domestic consumers cannot increase sales and consumption more than enough to cover the decline in foreign sales and consumption, then the strong currency will negatively affect and economy. However, if domestic consumers can increase domestic sales and consumption more than enough to cover the decline in foreign sales and consumption of domestic goods and services, then the strong currency will positively affect an economy. It all depends on just how strong the currency is.