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A depreciation of the home currency has the opposite effects. Thus, depreciation of a currency tends to increase a country's balance of trade (exports minus imports) by improving the competitiveness of domestic goods in foreign markets while making foreign goods less competitive in the domestic market by becoming more expensive.
Brazilian Finance Minister Guido Mantega, who made headlines when he raised the alarm about a currency war in September 2010. Currency war, also known as competitive devaluations, is a condition in international affairs where countries seek to gain a trade advantage over other countries by causing the exchange rate of their currency to fall in relation to other currencies.
In a fragile economy, every country wants to expand its exports, and low currency values can help make products cheaper to international buyers. Could countries' efforts to stay competitive be ...
This is partly due to disagreement over the actual effects of the undervalued yuan on capital markets, trade deficits, and the US domestic economy. [citation needed] Paul Krugman argued in 2010, that China intentionally devalued its currency to boost its exports to the United States and as a result, widening its trade deficit with the US ...
All in all, foreign currency translation had a negative impact of $0.01 and $0.17, respectively, on McDonald's diluted earnings per share for the quarter and year ended Dec. 31, 2012.
The initial effect of dollar depreciation to $.011/yen is to make imports cost $110 million, and the deficit rises to $50 million. If the long-run export and import elasticities equal .5 and -.5, exports will rise 5% to $63 million and imports will fall 5% to $104.5 million.
Hume argued that England could not permanently gain from exports, because hoarding gold (i.e., currency) would make gold more plentiful in England; therefore, the prices of English goods would rise, making them less attractive exports and making foreign goods more attractive imports. In this way, countries' trade balances would balance out.
However, this could worsen the effects of Dutch disease, as large inflows of foreign capital are usually provided by the export sector and bought up by the import sector. Imposing tariffs on imported goods will artificially reduce that sector's demand for foreign currency, leading to further appreciation of the real exchange rate. [10]