From time to time you will hear that one of the benefits of a weaker currency is that it will increase exports. This sounds really good because in every introductory economics class, students are taught that higher net exports increase GDP. We naturally think of GDP as the total measure of wealth in the country.
This is the wrong way to look at it. Now our dollar, the measure of our labor, buys less of a foreign good. That doesn't sound good at all. It now takes more of my money to buy the foreign things that I want. Conversely, foreign consumers can now buy more of our products for less of their money. We are working more to make less!
This may be another reason why GDP may not be as accurate of a reflection of the economy as it could be. One way to adjust for this might be to adjust Net Exports by the change in the dollar compared to a basket of international currencies.
Thursday, April 8, 2010
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"buy the foreign things that I want"
ReplyDeleteWhy should you have to buy foreign things? Why not manufacture it in your own country, and buy it with your dollars, making its value external to your country irrelevant?
Of course, a high dollar is bad for the exporting industry, meaning that jobs will be lost in manufacturing.
Basically, two sides to every coin. Lower dollar = more easily sustainable jobs and economy. Higher dollar = more buying power, but a more difficult economy to maintain.
Not every product I want should be made domestically. Many countries are better at making different products then we are. They can produce them cheaper or more efficiently.
ReplyDeleteBy having Americans focus on making the products we are most efficient at, we can profit most by trading with those countries that focus on the products they are best at making, we can all trade and profit more.