My beliefs when I was around 9-10 years old that when my country’s currency (Ringgit Malaysia) got worse compared to the US dollar (depreciation of RM), that meant things were not good in my country and the currency had better rise back up soon or else things would be really bad. There are also many conversations that Malaysia is a lousy economy just because one Singapore (our closest neighbor) dollar has become three Malaysian ringgit in the last 10 years.
After studying economics for the last 3 years, I have learned that the exchange rate does not define an entire economy.
There are some truths and some false things in that statement, just like everything in economics, there are pros and cons. Below, I outline the benefits of a depreciation in a country’s currency which applies to most economies.
- Trade
Currency has a great impact on international trade. To put it in simple terms, when your currency drops in value, you will purchase less from foreign countries because foreign goods has become more expensive. For example, if 4 RM = 1USD today becomes 5 RM = 1USD next month, you would not be buying any US products if you were Malaysian. Hence, you would be force to buy local goods, thus boosting the local economy by spending more in the domestic economy.
What about for foreigners buying our exports when the currency depreciates ? When 1USD = 1 RM today, and becomes 1 USD = 2 RM tomorrow, it would be cheaper for an American to buy Malaysian goods. Hence, Malaysian exports increase, boosting the Malaysian economy, creating more jobs and income.
- Current Account
The current account basically records all transactions between one country and other foreign countries. It records money flows coming from exports, imports, interest on debts, dividends etc.
One segment of the current account will be benefited by currency depreciation and that segment is the Balance on Goods and Services (BOGS). BOGS is a section which records the money flow of exports and imports. As mentioned before, currency depreciation increases exports and decreases imports. Hence, more money will be flowing in from increasing exports; less money will be flowing out from decreasing imports. The BOGS will tend to have a bigger surplus or a smaller deficit.
*Surplus – have money leftover after deducting payments from income.
*Deficit – still owe money after deducting payments from income. - Economy
Again, focusing on trade, when the currency depreciates, less import and larger exports cause an economy to grow and expand at a faster rate. This is because the economy will produce more goods to be exported and to satisfy demand. To use the right jargon, the aggregate demand of an economy rises causing the economy to expand.
*Read about aggregate demand in our future post. - Current Account (again)
Yes, there is another section of the current account that benefits. That is the primary income section. Primary income accounts all the transactions for interest payments, interest received, dividends etc. It records investment transactions in other words.
So, when 1 USD = 3 RM becomes 1 USD = 4 RM, there is a clear depreciation of the RM. Hence, when the US repays its Malaysian investors, Malaysian investors receive more money when the RM depreciates. For example, (using the same exchange rate above) a US borrower would have to repay a Malaysian lender 4 RM for every 1 USD of debt instead of 3 RM because the RM depreciated.
Hence, when a currency depreciates, primary income section tends to have a bigger surplus or smaller deficit.
Above are some of the clear benefits coming from a currency depreciation. Hence, whenever you talk about movements in your currency, try thinking of the benefits which could come using some basics of economics.
Now I will show real statistics of an economy due to currency depreciation.
of Australia
As seen in the Trade Weighted Index (TWI) of Australia, there is clear trend of depreciation of Australian Dollar (AUD) since 2016 up to 2019.
TWI increase shows currency appreciation and vice versa.
With that depreciation, clearly we can see that Australia has managed to increase its surplus on Balance of Trade.
Note: Other factors could have caused the rise in trade surplus as well. Iron (One of Australia’s main exports) prices rose in this period.
And the Current Account has managed to move to a surplus from a deficit in that period.
Note: Other factors could have helped as well. Australia has historically had a Current Account Deficit for a long time because of its need to borrow more as there is a low savings amount in Australia. This is because of its small population.
However, Gross Domestic Product (GDP) -often used to measure economic growth- has not increased by much in that period, increasing by a rate of 2-3% yearly in that period. Hence, currency depreciation did not do much here to boost its economic growth.
Read how a currency moves here.
The Economics Amateur 
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