[miron]

If a country lowers the wages, what is the expected impact in its exchange rate (assuming that follows a floating rate policy)?

[Curlyben]

What do YOU think ?
While we're happy to HELP we won't do all the work for you.
Show us what you have done and where you are having problems..

[miron]

Thank you for your reply,

Indeed I have put some thought into the problem. There are 2 approaches that I think, but they conclude to different result:

1) Lower wages lead to lower purchasing power, which leads to higher inflation, which leads to depreciation of domestic currency in order to become competitive at international level.

2) Lower wages lead foreign capital to flow inside country (e.g. a foreign country can buy cheaper domestic workforce/services). So, if supply of foreign capital grows, then foreign currency depreciates and domestic currency appreciates.

I think that both explanations are correct, but the first refers to micro (short run) and the second refers to macro (long run).

Has my reasoning any flaws that I overlook?

Thank you.