How a Weak Currency Affects an Economy

by Stephan Smith on June 4, 2011

When it comes to currency strength, the majority of the time users are asked if they would rather have a strong currency or a weak currency, they would choose a strong currency. Allow me to explain what I mean just in case you aren’t familiar with the terms “strong currency” and “weak currency”.

When I say a “strong currency” or “weak currency”, I am not talking about its physical makeup but the valuation of a currency relative to another. So when I say “strong currency”, I am talking about a currency with a higher value relative to other currencies. When I say “weak currency”, I am talking about a currency with a lower value relative to other currencies. Got it?

Now back to the subject. Why would users of a currency choose a strong currency over a weak one? Is having a strong currency better than having a weak currency? Would you chose a strong currency over a weak one? How does currency strength affect an economy? That’s a good question. If you would like to learn how a strong currency affects an economy, I recommend you read my article on the topic by clicking the link in this sentence. In this article I plan to tackle the question: how does a weak currency affects an economy?

I will also talk about the primary advantage and primary disadvantage of having a weak currency. Yes, there is a benefit to having a weak currency if you were skeptical. Ok, let’s begin.

Primary Advantage of Having a Weak Currency

As you may know, the selling of goods and services occurs not just intranationally, but internationally as well. The benefit of having a weak currency is not felt when domestic producers create and sell goods and services whose parts and components are acquired, manufactured and sold domestically. It is through international trade, the creation and selling of goods and services to foreign consumers in other economies is where the benefit of a weak currency is realized.

Pricing goods and services with a weak currency and selling to foreign consumers who use a stronger currency increases the demand for those domestically created goods and services. If more foreign consumers can afford what domestic producers are selling, then there will be more sales. Domestic producers will make more sales and money through international trade when there is a weak currency. That is the primary advantage of having a weak currency. Put it simply, a weak currency benefits domestic producers selling to foreign consumers.

A portion of domestic producers can be hurt from a weak currency if the goods and services they sell locally, partially or entirely originates from a foreign economy. Why? Because those domestic producers would have to pay more money to acquire what is needed if the economy they are buying their parts, components, ect. from has a stronger currency. If domestic producers are paying more to create their goods and services, then the prices for those goods and services will increase and thus decrease demand for them locally.

Primary Disadvantage of Having a Weak Currency

Now that you have a good understanding of the primary benefit of having a weak currency, now is the time to explain the primary disadvantage. Because the currency is weak, domestic consumers looking to purchase and consume goods and services from foreign producers will have to pay more. Domestic consumers may even have to pay more money to buy goods and services locally if the domestic producers get their parts, components or entire product or service from foreign economies.

If a domestic consumer wants to by a car that was manufactured domestically, with parts obtained domestically and was sold domestically, that consumer would most likely get a reasonable price for that good. But if the car’s manufacturing process involved foreign economies, and if parts had to be purchased from foreign economies, then the price would be higher simply because of the various currency valuations. A weak currency hurts domestic consumers trying to buy and consume goods and services from foreign producers. A weak currency may even hurt domestic consumers trying to buy and consume goods and services from domestic producers to some extent.

A Weak Currency and How It Affects an Economy

So just how does a weak currency affect an economy? As I mentioned above, a weak currency tends to benefit domestic producers because a weak currency increases foreign demand for domestic goods and services. A weak currency can also hurt domestic consumers because domestic consumers would have to pay more for foreign goods and services and may have to pay more for domestically sold goods and services that have been obtained partially or entirely from foreign economies.

Goods like oil will be more expensive for domestic consumers and thus decrease demand for many other domestic goods and services. That would have a negative impact on sales and consumption because domestic consumers are spending more of their income on the elevated costs of oil and other imported goods and services. That coupled with improved foreign demand for domestic goods and services make it quite difficult to tell just how an economy will be impacted.

It truly depends on how severely weak the currency is. If foreign demand for goods and services results in more than enough sales and consumption to cover the potential slow down in domestic consumption by domestic consumers, then a weak currency will positively affect an economy. However, if a currency becomes too weak and foreign demand for goods and services fails to more than cover the slow down in domestic consumption by domestic consumers, then it will result in negatively affecting an economy. It all depends on just how weak the currency is.



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