Relationship between exchange rate and growth for medium level developed country?



Answer:
The exchange rate should get stronger for the country if it exports more than it imports, because exports cause money to come into the country, from the country {s} buying the export. Imports cause money to flow out of the country to pay for the products imported.
I think the technical name is balance of payments.
I think most people think if you can lower the value of your dollar then you can sell more products abroad. This will also attract foreign capital which can increase your capital stock and mean more income in the following years.

This kind of thinking is consistent with growth in China and the other so-called 'Asian Tigers' that grew out of poverty relatively recently by increasing exports, capital.

But if you think of the economy as a circular flow, you can't get something for nothing, and every attempt to steer the economy in one direction there is an opposite direction that may counter it. How does one lower the value of the dollar or home currency? By printing more money. But that increases inflation and either people will demand more money to purchase the exports or they buy less. It is better to subsidize exports, but this means you have to pay for these subsidies in the form of higher taxes, angering your citizens.

I tend to believe these 'export led growth' theories because they sort of force people to save and invest. And, because I feel that more recent investment has more technological change, the country tends to grow faster and therefore provide more benefits and the whole thing can pay for itself. India is a good example, as is China. But for sure there are many who don't see any benefits to the rise in exports and you have incredible inequality.

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