Tuesday, January 27, 2009

A Thousand Words

. Tuesday, January 27, 2009



Left vertical axis: total U.S. exports, seasonally adjusted, in millions USD (source: BEA)
Right vertical axis: value of U.S. dollar vs. a basket of major foreign currencies (source: St. Louis Fed)

Something about Dr. Oatley's analysis below didn't seem right to me. Have a look at the graph above. Obviously, one graph doesn't prove or disprove anything, but a first glance at recent history seems to indicate that U.S. exports and the value of the dollar are negatively correlated. In other words, as the value of the dollar declines, exports rise. Or, in the language of the post below this one, it seems that the demand for U.S. good is sufficiently responsive to price changes -- i.e. demand is sufficiently elastic -- to produce an increase in exports as the value of the dollar decreases.

Now whether a dollar devaluation would lead to a net benefit to the U.S. is an open question, because (as Dr. Oatley pointed out) a weakening dollar also means a decline in relative national income. But with the economy in less than full employment, it seems that a moderate weakening of the dollar could generate some welfare gains by spurring the utilization of presently dormant resources.

Like I said, one graph doesn't prove or disprove anything. But this is one piece of evidence showing that demand for U.S. goods is not strongly inelastic. And if that's the case, then U.S. policymakers are acting rationally to seek a moderate devaluation of the dollar in order to boost employment. Unfortunately, if it's rational for the U.S., it's also rational for other governments, and a series of competitive devaluations will lead to even greater economic ruin.

(This says nothing about the capital inflows -- made necessary by running a current account deficit -- which helped fuel the dot com and subprime bubbles. Perhaps more on that later.)

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A Thousand Words
 
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