How a Weak Currency Hurts a Domestic-Consumption-Based Economy

How a Weak Currency Hurts a Domestic-Consumption-Based Economy

Researcher :- Pawan Upadhyay

Email :- pawanupadhyay28@hotmail.com

I. Import Costs Rise

A weaker currency makes foreign goods—oil, technology, machinery, and essential inputs—more expensive, raising the cost of imports across the economy.

II. Inflation Increases

Costlier imports trigger imported inflation. Businesses pass higher costs to consumers, causing broad-based price rises.

III. Cash Outflow of the Country Increases

Because imports become expensive, the national cash outflow rises, while cash inflow from exports does not increase proportionally. This worsens the trade balance.

IV. Cash Outflows of Consumers Rise

Consumers face higher expenses for essentials such as food, fuel, transport, utilities, and healthcare. Inflation forces them to spend more just to maintain the same standard of living.

V. Salaries and Incomes Stay Constant

Due to weak demand for goods and services, businesses do not raise salaries or expand hiring. Real incomes stagnate while prices rise, reducing purchasing power.

VI. Lower Income Reduces Demand Further

When incomes stay flat but expenses rise, consumers cut discretionary spending. This lowers domestic demand, damaging retail, services, and MSMEs.

VII. Domestic Businesses Suffer

With rising input costs and falling demand, businesses face shrinking margins, lower sales, and reduced profitability. Smaller firms struggle the most.

VIII. Cost of Living Becomes High

Inflation combined with stagnant wages raises the overall cost of living, disproportionately impacting middle- and low-income groups.

IX. Cash Outflows of Consumers = Cash Inflows to the Domestic Economy

Consumer spending is the primary inflow that fuels a consumption-led economy. When consumers are forced to spend higher amounts on inflation-driven essentials, less money circulates toward productive sectors. This weakens economic activity.

X. Economic Growth Slows

Since consumption drives GDP in such economies, reduced purchasing power and weakened domestic demand slow down overall economic growth and may cause recessionary pressures.