Originally posted here.
Uncle Sam argues that China unjustly gains economic benefits by keeping the yuan undervalued (“U.S. Expected to Press China on Yuan,” Feb. 17). Bad argument.
When I was a boy, my school held fund-raising fairs. Using dollars, my classmates and I purchased as many fair ‘tickets’ as we wanted. We then used these tickets to buy whatever foods and toys were sold at the fair. Of course, some items cost more tickets than other items. Each ticket, though, exchanged for a fixed number of dollars.
Suppose my school had undervalued its fair tickets – that is, suppose it gave too many tickets in exchange for each dollar. (Or, put differently, suppose my school had demanded in return for each fair ticket too few dollars.) Who’d be harmed? The answer is my school. By undervaluing its tickets, my school would have sold its fair items at prices below cost. Its revenue at the end of the day would have been lower than its costs. Rather than raising money, my school would have lost money – and we students would have been made wealthier as a result!
The same holds true for China. If the yuan is undervalued, you can be sure that this policy drains wealth from China rather than builds wealth there – and makes Americans richer in the process.
Sincerely,
Donald J. Boudreaux
To elaborate on Don’s analogy, if China sold us their currency at a rate of $0.00 dollars for every yuan instead of the current rate of $0.14 dollars would we complain? Of course not! They would be giving us free money which we could then use to buy all sorts of great Chinese products (like Apple’s iPod which is made in China). So if we wouldn’t complain about them giving us their currency for free, why complain about them giving us a discount on it? It only makes us richer and them poorer…doesn’t sound like a bad deal to me. Free iPods anyone?