It is common to hear explanation like "Yuan has lost value, this helps Chinese exporters". Why does currency exchange rate have any effect at all on the price of goods?
Let's say I own a widget factory producing widgets that each have a value of 10 lirettos, and my business is to export these to America for 11 lirettos each. Then one day, my government has some sort of scandal and the liretto/dollar rate falls from 0.2 USD per liretto to 0.1 USD per liretto. The newspapers congratulate me - now that my price is half of what it used to be, my export widgets should sell like hot cakes! However:
- Americans were happy paying $2.2 per widget. Why would I suddenly charge them $1.1? American widget enthusiasts aren't suddenly going to start wanting widgets only half as badly just because a liretto isn't as valuable now. I would just export at 22 lirettos instead of 11.
- My expenses wouldn't stay the same either. Maybe the liretto isn't worth as much now, but an hour of work is still an hour of work. If I tried to pay my workers the same nominal amount, even though it's worth half as much now, they would be outraged. They read the news too, after all.
- Some of the materials I use to make widgets are imported anyway. Just like my American customers who don't demand cheaper widgets all of a sudden, my material suppliers won't give me an "inflation discount". They will expect me to pay twice as many lirettos per unit good, since the lirettos are now worth half as much.
I don't see how the currency exchange rate would affect anything at all. Most people in countries with fluctuating currency are aware of exchange rate trends. Everyone should be simply adjusting their prices and price expectations in proportion to the change in value. Maybe if the government decides to be stubborn, the purchasing power of public employees would change and impact the consumer demand within the country. But import/export businesses should be the least affected. Why then is it said that currency rate changes have an effect on imports/exports? Do international trade companies fail to keep up with changes in currency rates?