Friday, October 22, 2010

Trade Fact of the Week

Given my talk on China I thought some of you may find this interestingHere's a longer article.

Here is Greg Mankiw on currency manipulation. 

Here is Paul Krugman on currency manipulation.

And let's add one more

So should the U.S. pressure China into letting the yuan appreciate?

Yes there is a lot of political pressure to protect American jobs. Most politicians understand there are benefits and costs when it comes to trade. Normally the benefits outweigh the costs (job losses). The job losses are concentrated in states that have historically relied on manufacturing. These states (i.e. the rustbelt) are also political swing states. Again this is the difference between economics and politics.

Remember a country's currency is priced relative to another country. The yuan is priced at 7, which means it takes 7 yuan to buy 1 dollar. If the yuan appreciates it will take fewer yuan to buy a dollar. It terms of trade, if the yuan is low (undervalued) then one dollar can purchase a lot of yuan (and subsequently a lot of goods). As the yuan appreciates the price of Chinese imports increases, and U.S. exports decreases.

Fortunately most countries price commodities in terms of dollars. A lower value of the dollar won't have a large impact on the price's because the commodities won't change.

1 comment:

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