Does currency devaluation lead to an increase in export revenue?

Let us assume a country with a fixed exchange rate such as Hong Kong. As devaluation only works when there is a fixed exchange rate, which is not governed solely by market forces (S&D). This allows for artificial depreciation. A country such as Hong Kong may decide to devalue its currency, making it depreciate against other major currencies. Consequently, price competitiveness will rise. This is because goods/services now appear to be cheaper to importers, as their domestic currency can buy more Hong Kong Dollars in contrast to before. As goods are cheaper, more is demanded. Thus, overall export revenue should increase, combined with economic growth due to the multiplier effect. However, in order to critically assess this statement we can discuss short/long term implications, by using the J-Curve. The J-Curve states that in the short-run demand for exports is price inelastic. As seen in unit 1, a lower price does not lead to an increase in revenue when PED is < 1. Therefore, in the short-run revenue is likely to fall. In the long-run, PED will become elastic (>1), therefore in theory, export revenue should rise, as importers have more options of suppliers overtime and generally elasticity rises over the long term. 

Answered by Gleb P. Economics tutor

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