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Currency Undervaluation and Comparative Advantage

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  • Paul Bergin

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: agglomeration versus an elasticity effect.

Suggested Citation

  • Paul Bergin, 2022. "Currency Undervaluation and Comparative Advantage," NBER Working Papers 29699, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:29699
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    JEL classification:

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

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