Side Effects of A Weak South African Currency

What happens when a currency weakens?

A weak currency may help a country’s exports gain market share when its goods are less expensive compared to goods priced in stronger currencies. … For example, when purchasing American-made items becomes less expensive than buying from other countries, American exports tend to increase, and the dollar weakens.

Pros and Cons of a Weak Currency

A weak currency may help a country’s exports gain market share when its goods are less expensive compared to goods priced in stronger currencies. The increase in sales may boost economic growth and jobs, while increasing profits for companies conducting business in foreign markets. For example, when purchasing American-made items becomes less expensive than buying from other countries, American exports tend to increase, and the dollar weakens. In contrast, when the value of a dollar rises, exporters face greater challenges selling American-made products overseas.

Because more of a weak currency is needed when buying the same amount of goods priced in a stronger currency, inflation may climb when economies import goods from countries with stronger currencies. In contrast, low economic growth may result in deflation and become a bigger risk for some countries. When consumers begin expecting regular price declines, they may postpone spending and businesses may delay investing. A self-perpetuating cycle of slowing economic activity begins.

A weak currency may boost consumers’ incomes and tax receipts, while benefiting debtors. When the value of debt remains the same, local borrowers may more easily pay down their debts. Conversely, paying back debt to foreign investors priced in foreign currency becomes more expensive.

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