Yesterday I talked about how some exogenous factors such as exchange rates might not affect trade between countries because trade depends on the countries’ comparative advantages rather than absolute advantages. However, in the real world, we often can see some cases where the exchange rate changes affect the exports. Then how does exchange rates affect the trade under the comparative advantage theory?
This is because the theory of comparative advantage plays a more significant role in inter-sector trade rather than an intra-sector trade. In the real world, trade between some countries is intra-sector trade, as they exports the goods and services that have some differences but belong to similar categories to each other, such exporters gain revenues from product differentiation. For example, Germany, France and Britain export cars to each other, such trade is an intra-sector trade and car exporters gain revenue from their differentiated cars can gain different types of consumers. However, when prices change, the oligopolistic power created by market differentiation would be weakened, so when the exchange rate changes, the prices change accordingly, then the sales would be affected. Moreover, the costs and revenues of exporters are calculated by different currency units, when the exchange rates change, the ratios of revenues to costs change, this would affect the exporters’ strategies, even would change the decisions whether they would continue to export their products.
To conclude, exchange rate will not affect the inter-sector trade as significantly as it affects the intra-sector trade.
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