Tuesday, September 27, 2016

Ari Andricopoulos — On Currency Devaluation (Deliberate and Otherwise)

It is an unstated central bank policy in many parts of the world to reduce the value of their currency to below its fair value. The reason for doing so is 'competitiveness'. A weaker currency means lower global prices for your goods and hence increases your exports, while at the same time reducing imports. Since a fundamental equation of economics says that GDP = C+I+G+X, or consumption plus investment plus government expenditure plus net exports; it would appear self evident that an increase in net exports would increase GDP.
This is, unfortunately, completely wrong. There are two ways that it is wrong, both pretty fundamental….
Notes on the Next Bust Ari Andricopoulos, principal at Dacharan Advisory AG, PhD. in Financial Mathematics

1 comment:

Matt Franko said...

"2. Does an fall in currency increase net exports?"

Should be: 'does a reduction in the price of export goods in the foreign currency terms increase exports?'...