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Currency undervaluation and comparative advantage

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  • Bergin, Paul R.

Abstract

This paper highlights a tradeoff implied by a policy of export-led growth through currency undervaluation. While undervaluation can foster domestic manufacturing in countries like China by sustaining trade surplus, it also can harm a country's comparative advantage by altering the composition of exports. Undervaluation may discourage specializing in high-value added manufacturing and instead favor specialization in non-differentiated goods with higher price elasticity. A dynamic general equilibrium model of two traded good sectors and capital account restrictions shows that undervaluation can either raise or lower welfare depending on two competing effects on comparative advantage: an elasticity effect versus an agglomeration effect working through firm entry and roundabout production.

Suggested Citation

  • Bergin, Paul R., 2022. "Currency undervaluation and comparative advantage," European Economic Review, Elsevier, vol. 150(C).
    • Handle: RePEc:eee:eecrev:v:150:y:2022:i:c:s0014292122001969
    DOI: 10.1016/j.euroecorev.2022.104316
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    1. Bergin, Paul R. & Choi, Woo Jin & Pyun, Ju H., 2023. "Catching up by ‘Deglobalizing’: Capital account policy and economic growth," Journal of International Money and Finance, Elsevier, vol. 138(C).

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    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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