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Comments on: The exchange rate as a price http://www.tvhe.co.nz/2013/02/27/the-exchange-rate-as-a-price/ The Visible Hand in Economics Sun, 03 Mar 2013 01:13:02 +0000 hourly 1 https://wordpress.org/?v=6.9.4 By: The dollar is a price - My Note Book | My Note Book http://www.tvhe.co.nz/2013/02/27/the-exchange-rate-as-a-price/#comment-40597 Sun, 03 Mar 2013 01:13:02 +0000 http://www.tvhe.co.nz/?p=8349#comment-40597 […] Nolan’s bemoaned that nobody quite seems to understand that exchange rates are just a price. He would love this particular […]

]]> By: Matt Nolan http://www.tvhe.co.nz/2013/02/27/the-exchange-rate-as-a-price/#comment-40596 Sat, 02 Mar 2013 02:18:00 +0000 http://www.tvhe.co.nz/?p=8349#comment-40596 In reply to PaulL.

Hi PaulL,

A higher New Zealand dollar implies that, at a given “global price” and a given “domestic price”, the return to exporters is lower.

You are right that a higher dollar is a transfer from “net exporters” to “net importers” within a country, and the issue gets complicated by the fact that global and domestic prices change over time – and how relatively scarce different goods and services are changes, in turn changing the price. When we see the dollar bobbing about, it is in turn telling us about how many of these things (which we can’t easily observe) are changing, or how expectations of them are changing.

As a result, we can’t really say what the “exchange rate” means without a bunch of other assumptions about the cause, it is these causes we should be discussing rather than the dollar itself – that is pretty much all I said. This is a fairly innocuous point in an economists mind, but judging by some of the people I’ve run into in the last week it is not such an innocuous point for everyone … 🙂

]]> By: PaulL http://www.tvhe.co.nz/2013/02/27/the-exchange-rate-as-a-price/#comment-40595 Sat, 02 Mar 2013 01:10:00 +0000 http://www.tvhe.co.nz/?p=8349#comment-40595 So, I’ve been thinking on this post and Eric Crampton’s related post at http://offsettingbehaviour.blogspot.com.au/2013/03/the-dollar-is-price.html. I intuitively always assume that a high exchange rate benefits exporters (they get paid more) and harms local production. But I hadn’t thought that all the way through. I’ve done some thought experiments here http://technpol.wordpress.com/2013/03/02/exchange-rates/, and I think my conclusion is:
– A high exchange rate is universally good for the country if you are a price setter – because your exports are worth more in international terms
– A high exchange rate makes no difference to your terms of trade if you are a price taker, your price in external currency has not changed. However, depending on what happens in your local economy (do locally produced goods get cheaper in local currency terms or stay priced the same) it will alter the distribution of income between different segments of the economy.
In short, I think this debate is therefore one in which exporters who are price takers are attempting to avoid their incomes reducing relative to the other people in NZ. It isn’t a discussion about NZ v’s the world, it’s a discussion about some special interests wanting a better deal.

]]> By: Exchange Rates | technpol http://www.tvhe.co.nz/2013/02/27/the-exchange-rate-as-a-price/#comment-40594 Sat, 02 Mar 2013 01:01:44 +0000 http://www.tvhe.co.nz/?p=8349#comment-40594 […] Yesterday I read my favourite economics blogger, Eric Crampton, and in particular his article on exchange rates.  He in turn linked to Matt Nolan, with the exchange rate as a price. […]

]]> By: Matt Nolan http://www.tvhe.co.nz/2013/02/27/the-exchange-rate-as-a-price/#comment-40591 Thu, 28 Feb 2013 17:20:00 +0000 http://www.tvhe.co.nz/?p=8349#comment-40591 In reply to jamesz.

You are tall and talk with a beautiful voice though – you are like Yoda before when he was human and hadn’t aged. Now I’m short and talk funny, but I rarely say anything wise 😉

]]> By: jamesz http://www.tvhe.co.nz/2013/02/27/the-exchange-rate-as-a-price/#comment-40589 Thu, 28 Feb 2013 08:39:00 +0000 http://www.tvhe.co.nz/?p=8349#comment-40589 In reply to Matt Nolan.

A small person with a funny way of talking and largely ignored by everyone? There are certainly similarities.

]]> By: Matt Nolan http://www.tvhe.co.nz/2013/02/27/the-exchange-rate-as-a-price/#comment-40588 Thu, 28 Feb 2013 01:08:00 +0000 http://www.tvhe.co.nz/?p=8349#comment-40588 In reply to jamesz.

Are you the Yoda of UK economics now – if so I am extremely keen to go over there and watch!

]]> By: jamesz http://www.tvhe.co.nz/2013/02/27/the-exchange-rate-as-a-price/#comment-40579 Wed, 27 Feb 2013 17:08:00 +0000 http://www.tvhe.co.nz/?p=8349#comment-40579 In reply to Matt Nolan.

“Look inside yourself, you must. There the imbalances, you will find. Difficult, it will be.”

]]> By: Matt Nolan http://www.tvhe.co.nz/2013/02/27/the-exchange-rate-as-a-price/#comment-40578 Wed, 27 Feb 2013 16:37:00 +0000 http://www.tvhe.co.nz/?p=8349#comment-40578 In reply to jamesz.

LOL, no-one is necessarily a problem – it is more a question of asking why things happen in order to both understand what we can do, and what we should do.

People simultaneously think we can pull a lever and make things better, without truly asking whether we can pull the lever and what the trade-offs are. Reframing and trying to clarify are mechanisms to help everyone, including myself, try to do this 😛

]]> By: jamesz http://www.tvhe.co.nz/2013/02/27/the-exchange-rate-as-a-price/#comment-40577 Wed, 27 Feb 2013 08:48:00 +0000 http://www.tvhe.co.nz/?p=8349#comment-40577 Matt: The Chinese are not the problem, YOU are the problem. You just don’t understand that yet but some meditation will help.

Everyone: WTF are you talking about, I’m not the damn problem!

Matt: Hey, how is recommending you meditate on your flaws in any way offensive? We should all be doing that, anyway!

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