Export oriented businesses concerned about competitiveness would prefer which of the following?
1. a strong currency
2. a floating exchange rate
3. a weak currency
4. domestic monetary-policy autonomy by their governments to deal with the domestic economy
The correct answer and explanation is:
The correct answer is 3. a weak currency.
Export-oriented businesses generally benefit from a weaker currency because it makes their goods and services more affordable to foreign buyers. When a country’s currency depreciates relative to others, the price of its exports decreases in foreign markets, giving the exporting businesses a competitive advantage. For example, if the U.S. dollar weakens, American-made products become cheaper for customers in other countries, which can lead to an increase in demand for those goods. This helps boost the country’s export volumes and overall economic growth, especially in industries that depend on international sales.
In contrast, a strong currency (option 1) makes a country’s exports more expensive for foreign consumers. While it might benefit businesses that rely on importing raw materials or components, it generally harms exporters because their goods become less competitively priced on the global market. Exporters may find it harder to maintain sales when their products become more expensive in other currencies.
A floating exchange rate (option 2) gives a country more flexibility to let its currency fluctuate based on market forces. While this can allow for adjustments over time, export-oriented businesses typically prefer a weaker currency to remain competitive in international markets. A floating exchange rate does not guarantee a weak currency, as it depends on market conditions.
Domestic monetary-policy autonomy (option 4) refers to the ability of a government to set its own monetary policy, which may be beneficial in managing inflation or employment within the domestic economy. However, in terms of competitiveness for export businesses, it is the strength or weakness of the currency that plays a more significant role.
Therefore, a weak currency is most beneficial for export-oriented businesses looking to stay competitive globally.