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November 15, 2016


stephen parsons

But the exchange rate doesn’t work the way you think it does! I know it’s always said (like in your textbook I expect) that “devaluation makes our exports cheaper”; but devaluation doesn’t do this. You can see this clearly illustrated here http://stephensays.stparsons.co.uk/#post14.


I have to agree. It has always seemed "obvious" (to me) that any country that imports more value than it exports should aim for a higher exchange rate, apart from needing to attract inward investment to offset the "bad" balance of payments, through higher interest rates.

Once value has been added to those imports used to create exports any profit margin is necessarily squeezed by a currency depreciation.
Obvious? What arguments can be made to the contrary?


Whatever happened to that Ronald McDonald guy?

Miguel Madeira

I imagine that flexible exchange rates only equilibriate the trade balance in an economy without international movements of capital.

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