Friday, March 5, 2010
Race to the bottom
This is a good article about the depreciating values of generally strong currencies. It talks about how some governments are not necessarily concerned by this because of the boost they may see in exports. Comments on how the US is doing nothing to try to raise the value of their currency. It also interestingly mentions that countries with relatively strong currencies are trying to devalue their own currencies in reaction to this.
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The article discuss a new trend seen among many strong economies; they want to devalue their currency so that they can export their goods and make profits out of it. I know for a fact that Bangladesh central bank keeps the dollar exchage rate constant so that our importers can import things at the same amount of Bangladeshi Taka. So the two policies are in opposite direction; an import dependent country tries to increase the value and an export dependent country tries to devalue. Different economies, different sice, different policies.
ReplyDeleteAs we now, no variable of economics can describe the economy as a whole on its own. If a country is experiencing a trade deficit it would make sense for that country to want to depreciate their currency against other currencies in order to start exporting more than they import to lower their trade deficit.
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ReplyDeleteAccording to the present situation---the depreciations of some countries have not caused high inflations, I agree with the idea of depreciating the currency. It is profitable to depreciate one’s currency, since it is a favorable condition to a country’s exportation. However, I was wondering when many countries try to depreciate their currency, what the result would be? Probably, it would evolve into an unhealthy competition.
ReplyDeleteI don't think this trend of depreciating one's currency will have much of a positive effect. This is because if most economies devalue their currencies, they will cancel out each other's effect. This is similar to a situation of perfect competition where one firm decreases its price and all the other firms also decrease their prices and this starts a price war. In the end prices reach record low while firms experience hardly any change in the quantity demand of their products which results in lower revenue for all.
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