Tuesday , February 20 2018
Home / Robert Murphy: Free Advice / Currency Devaluation, Export Advantage, and Commodity Prices

Currency Devaluation, Export Advantage, and Commodity Prices

Summary:
I am mostly doing this as a placeholder. I wrote this article for Mises back in late 2010. A lot of it is standard stuff, but I got into the step-by-step adjustment to a currency devaluation, showing the sense in which it would shower benefits on certain groups. I vaguely remember that it took me a while to juggle all the figures around, so that in the finished draft, it was a nice smooth exposition with round numbers. After I wrote it, I had tried several times to find it again, but couldn’t. But the other day I accidentally stumbled upon it, and so now I’m making this post in the hopes that it helps me find it in the future. Anyway, here’s an excerpt: At this point, it’s tempting to think that the Fed’s announcement would have no effect on the pattern of global

Topics:
Robert Murphy considers the following as important: , ,

This could be interesting, too:

Robert Murphy writes Jeff Deist Interviews Michael Malice About North Korea

Don Boudreaux writes A Protectionist is Someone Who…

Don Boudreaux writes Freeman Essay #91: “But what about …?”

Don Boudreaux writes Some Links

I am mostly doing this as a placeholder. I wrote this article for Mises back in late 2010. A lot of it is standard stuff, but I got into the step-by-step adjustment to a currency devaluation, showing the sense in which it would shower benefits on certain groups. I vaguely remember that it took me a while to juggle all the figures around, so that in the finished draft, it was a nice smooth exposition with round numbers.

After I wrote it, I had tried several times to find it again, but couldn’t. But the other day I accidentally stumbled upon it, and so now I’m making this post in the hopes that it helps me find it in the future.

Anyway, here’s an excerpt:

At this point, it’s tempting to think that the Fed’s announcement would have no effect on the pattern of global production and trade, and that it would merely tinker with nominal price tags. But this isn’t the case. Because domestic prices have various degrees of flexibility, the devaluation of the dollar in our example would give more than a fleeting advantage to American exporters.

Consider the wheat farmers: After the speculators quickly respond to the Fed’s announcement, the price of wheat rises from $5 to $8 per bushel. It’s certainly not that the wages of the employees working on the farm, or the mortgage payments made to the bank, will jump by a comparable percentage in a few moments. On the contrary, much of the American farmer’s expenses will remain fixed in price even though the sale price of wheat has risen 60 percent. American wheat farmers will therefore find the dollar devaluation to be very lucrative. From their perspective, it will appear as if millers (both domestic and foreign) for some reason have a hankering for American wheat, and the American farmers will increase their output to satisfy the new demand.

Things are the opposite for the European farmers. The demand for their product will collapse, such that the new equilibrium price falls to €4 from its original level of €5. This 20 percent drop in price cannot be simply “passed on” to workers, who have labor contracts specifying how many euros per hour they must be paid. Consequently, European farmers will scale back their production of wheat.

In the grand scheme of things, the Fed’s announcement of its plans to print more dollars will allow American wheat farmers (and other exporters of fungible commodities) to gain market share at the expense of farmers in other countries, whose currencies appreciate against the dollar. This is why Keynesian economists stress the (alleged) virtue of weakening a currency in order to “stimulate exports” and hence boost national output — net exports are a component of GDP in the standard formula.

Robert Murphy
Robert Patrick Murphy (born 23 May 1976) is an American economist, consultant and author. He is an economist with the Institute for Energy Research (IER) specializing in climate change and a research fellow with the Independent Institute, He was a senior fellow in business and economic studies at the Pacific Research Institute, and he is an associated scholar at the Ludwig von Mises Institute. In addition to economic subjects, Murphy writes about, and has presented an online video class in, anarcho-capitalism on the Mises Institute website. Murphy also has written in support of Intelligent Design theory and expressed skepticism of biological evolution.

Leave a Reply

Your email address will not be published. Required fields are marked *