Going back to an old question here but please bare with me.
1) How can exports be increased under inflation when inflation tends to raise the prices of goods purchased with the inflated currency. Wouldn't it encourage imports from other countries because of the foreign state's stronger currency?
2) It may be true that inflation can cause currency to lose value and so raise the value of foreign currencies thereby causing them to purchase from us more and us to sell to them more (and thereby causing the influx of foreign money to boost inflation to critical levels) yet, I don't know how this is supposed to happen theoretically. Money will more likely reach the native hands first and be spent in the native country first than go overseas no?
That's all thanks
fakename: So it's possible for money being supplied to enter foreign hands first and then be spent here in purchases which raise the prices here? I guess I had always thought it impossible that this could happen. But now for a new but similar question: Is there ever a time when inflation can spur imports?
So it's possible for money being supplied to enter foreign hands first and then be spent here in purchases which raise the prices here? I guess I had always thought it impossible that this could happen. But now for a new but similar question: Is there ever a time when inflation can spur imports?
Not quite. They obtain the cheaper money through currency exchanges. The banks are who currency exchanges go through and so the rate of exchange is affected more quickly then the inflation hitting the bottom consumers. This is where the disparity arises.
For your new question:
The free market response called "inflation" will result in a higher incentive for imports and less incentive for exports.
fakename: Going back to an old question here but please bare with me. 1) How can exports be increased under inflation when inflation tends to raise the prices of goods purchased with the inflated currency. Wouldn't it encourage imports from other countries because of the foreign state's stronger currency? 2) It may be true that inflation can cause currency to lose value and so raise the value of foreign currencies thereby causing them to purchase from us more and us to sell to them more (and thereby causing the influx of foreign money to boost inflation to critical levels) yet, I don't know how this is supposed to happen theoretically. Money will more likely reach the native hands first and be spent in the native country first than go overseas no? That's all thanks
If inflation inflates the price of our goods while devaluing our currency, so for people in a country with inflation their money will not buy the same amount of things that it used to. People in other countries(assuming ceteris paribus) will have a currency more valuable than the first countries currency. This means that they can buy more of the foreign goods, since the foreign goods will be cheaper.
Say America has high inflation and this causes the price of pencils to go from $1 to $2. Well this inflation also causes the dollar to lose some ground in its relationship to the Euro. The dollar is now worth only 1/2 a Euro, assuming at first it was a 1:1 ratio. When people in Europe want to buy something from the USA, it is now half the price it originally was, allowing them to buy more. When people buy more goods from America, the producers here can afford to hire more workers. Those workers now make more money, which allows them to buy more things, which allows the producers of the goods to hire more workers....etc.
This all theoretical, but I think understandable nonetheless, hope that helped.
But how is this to be squared with David Hume, Richard Cantillon, and I think even Jevons (who I only looked over briefly) who generally say that an increase in country A money will lead to a corresponding increase in price followed by a consequent flight of specie over to country B which has less money. The focus on money movements seem to indicate an importation of goods rather than an exportation.
Well, this question assumes that a trade deficit is bad. However, a trade deficit means that we are consuming more of what they are producing then they are consuming of what we are producing. That means our standard of living will be higher. I don't see anything wrong with that by itself. It must be understood that the things of true value are property, goods, resources, services, etc. Not money. Now if this is simply because of monetary manipulation, then this will certainly come back on the country with the deficit in the form of massive inflation when the producing country/countries realize the currency they are receiving is not worth what they believed it to be.
1)Let's take two currencies. RMB and USD. Let's suppose the exchange rate is 1 USD=6RMB. Now suppose I charge 5$ for my chair and that same chair would be sold at 30RMB. And let's suppose an average person earning RMB earns 100RMB per month. Well, let's now tip the inflation of the USD. So now the exchange rate is 1USD=3RMB. I haven't adjusted my prices to reflect this inflation yet and so i'm still charging 5$ and now only charging 15RMB for my chair. The person still earning 100 RMB per month just saw my prices drop in half. There is now more incentive for him/her to purchase my chair at 15RMB instead of 30RMB. This will increase how many chairs I export to the country that uses RMB. Therefore a country with more monetary discipline will see a higher standard of living. This is what we see happening in China and Europe right now relative to the USA.
2)The process of them purchasing more will cause the prices to reflect the reduction in goods and resources in the producing country which will in turn raise prices until they reflect the previous levels(so in my example I'm selling/exporting more chairs which creates a scarcity of the resources used to produce the chair and then the prices of wood and bolts go up causing my prices to have to increase as well). However, when central banks manipulate the currency you could see this natural affect resisted through bad monetary policies. For instance, suppose the Federal Reserve continued to inflate USD(Federal Reserve Notes) by buying more bank bonds and loaning more to the govt; thereby printing more money from thin air, this would cause more money to be competing for the same goods and services and create more inflation which would then in turn continue this disparity until the resources reach such a dangerously low level that the prices increase too quickly in response. However, that is not the free market causing this inflation, but is the bad monetary policies. The free market is trying to preserve a reserve amount of resources for emergencies such as a crop failure or scarcity of oil, or metal, etc.
However, focusing on controlling trade deficits and surpluses is like trying to stop someone from sneezing when they have a cold and blaming the sneezing instead of the cold. We need to focus on the problem and not the symptoms.
I don't think that having more imports over exports is bad but I do believe that on just its merits, the theory that exports increase in times of devalued money is false. See this from david hume . (of course this is not an argument from authority but it does a better of job of elaborating what I mean).
"Suppose four-fifths of all the money in GREAT BRITAIN to be annihilated in one night, and the nation reduced to the same condition, with regard to specie, as in the reigns of the HARRYS and EDWARDS,*45 what would be the consequence? Must not the price of all labour and commodities sink in proportion, and every thing be sold as cheap as they were in those ages? What nation could then dispute with us in any foreign market, or pretend to navigate or to sell manufactures at the same price, which to us would afford sufficient profit? In how little time, therefore, must this bring back the money which we had lost, and raise us to the level of all the neighbouring nations? Where, after we have arrived, we immediately lose the advantage of the cheapness of labour and commodities; and the farther flowing in of money is stopped by our fulness and repletion...
...Again, suppose, that all the money of GREAT BRITAIN were multiplied fivefold in a night, must not the contrary effect follow? Must not all labour and commodities rise to such an exorbitant height, that no neighbouring nations could afford to buy from us; while their commodities, on the other hand, became comparatively so cheap, that, in spite of all the laws which could be formed, they would be run in upon us, and our money flow out; till we fall to a level with foreigners, and lose that great superiority of riches, which had laid us under such disadvantages?"
So clearly, aside from the absurdity of a simultaneous inflation, still inflation seems to increase imports while deflation increases exports.
fakename: II.V.9 So clearly, aside from the absurdity of a simultaneous inflation, still inflation seems to increase imports while deflation increases exports.
I would disagree with you in your cause and affect. I would say the inflation or deflation are a result of the change in imports or exports. Not the other way around. This is the order that I see:
1) Monetary Mischeif(increase/decrease in money supply through central bank policies)
2) Import/Export disparity
3) Free Market Adjustment(inflation/deflation)
There are certainly intrastate economic affects simultaneously occurring, but if we are isolating the affects on an interstate basis(imports/exports) then this should be the order of things.
You will always hear our media and government point at 2) and 3) as the problem. Do not be fooled. Go to the root of the problem. Not the symptoms.
Austrians use the classic definition of inflation as the increase of money-substitutes over and above the money stock and in excess of demand for money. Price rises are the consequence of this. So 1) would be the inflationary step, 3) the consequence.
-Jon
Freedom of markets is positively correlated with the degree of evolution in any society...
so truly the increase in money spurs on trade inbalances and then causes inflation instead of the humean "inflation comes first" theory?
The increase in the money is the inflation in question.
fakename: so truly the increase in money spurs on trade inbalances and then causes inflation instead of the humean "inflation comes first" theory?
As a business owner who watches the process, inflation always comes after the pressure from the trade inbalances.
Suppose today the Federal Reserve doubled the money supply and gave that new money to the banks to loan out(through buying their bonds). Today my prices would still be the same. But then as the credit is made really cheap by the banks who are eager to loan out the new money and get it collecting interest, those they loan it out to will inevitably borrow it to spend it. So the money gets injected into the economy. My prices now are not correctly set according to this adjustment of the money supply yet. If I tried to set them early, I would lose my customers to my competition. Neither are my suppliers adjusted to this new increase in money. So I see a huge boom in business as people are flush with new money from the new credit. Then I'm buying more supplies. But my suppliers start to notice that their basic resources are diminishing since there is only a limited amount of basic resources(corn, labor, metal, oil, etc.), but such a high demand for them from all their vendors. So then when their reserve of supplies gets dangerously low they raise their prices to reflect this, or they will be out of business as they will have nothing left to sell and our resources will be gone. The scarcity drives up those prices. Then I notice it's costing much more from my suppliers and so I in turn raise my prices. And finally the inflation hits the consumer. But by that time prices will have super adjusted to overcome the dangerously low supply of resources. So then people have to equally conserve as much as they had previously overspent. So as people conserve the prices slowly come back down and then taper off but are still inflated higher then what they were to start with and rightfully so to reflect the total liquidity in the economy. We saw that happen with oil recently.
So on an import/export level, the country with the increased money supply has a lower demand for their currency as it is more easily available then before. But their businesses haven't adjusted their prices yet to reflect this new increase in the money supply. So foreigners go into that country with the easily available(cheaper) currency and buy up goods and services and create scarcity. The new scarcity drives up the prices which go very high(higher percentage wise then the increase of the money supply) until the resources are somewhat replenished and then come slowly back down but are higher then before to reflect the new increased money supply.
However, in the United States, until recently, we have not really gotten hit by this kind of natural inflation caused from an increase in exports due to the high demand for U.S. dollars as currency reserves around the world after the Brenton Woods Conference(1944). This created a situation of us exchanging dollars for goods around the world because the dollar was what their central banks required to create more of their own fiat currency.
therealjjj77: fakename: so truly the increase in money spurs on trade inbalances and then causes inflation instead of the humean "inflation comes first" theory? As a business owner who watches the process, inflation always comes after the pressure from the trade inbalances. Suppose today the Federal Reserve doubled the money supply and gave that new money to the banks to loan out(through buying their bonds). Today my prices would still be the same. But then as the credit is made really cheap by the banks who are eager to loan out the new money and get it collecting interest, those they loan it out to will inevitably borrow it to spend it. So the money gets injected into the economy. My prices now are not correctly set according to this adjustment of the money supply yet. If I tried to set them early, I would lose my customers to my competition. Neither are my suppliers adjusted to this new increase in money. So I see a huge boom in business as people are flush with new money from the new credit. Then I'm buying more supplies. But my suppliers start to notice that their basic resources are diminishing since there is only a limited amount of basic resources(corn, labor, metal, oil, etc.), but such a high demand for them from all their vendors. So then when their reserve of supplies gets dangerously low they raise their prices to reflect this, or they will be out of business as they will have nothing left to sell and our resources will be gone. The scarcity drives up those prices. Then I notice it's costing much more from my suppliers and so I in turn raise my prices. And finally the inflation hits the consumer. But by that time prices will have super adjusted to overcome the dangerously low supply of resources. So then people have to equally conserve as much as they had previously overspent. So as people conserve the prices slowly come back down and then taper off but are still inflated higher then what they were to start with and rightfully so to reflect the total liquidity in the economy. We saw that happen with oil recently. So on an import/export level, the country with the increased money supply has a lower demand for their currency as it is more easily available then before. But their businesses haven't adjusted their prices yet to reflect this new increase in the money supply. So foreigners go into that country with the easily available(cheaper) currency and buy up goods and services and create scarcity. The new scarcity drives up the prices which go very high(higher percentage wise then the increase of the money supply) until the resources are somewhat replenished and then come slowly back down but are higher then before to reflect the new increased money supply. However, in the United States, until recently, we have not really gotten hit by this kind of natural inflation caused from an increase in exports due to the high demand for U.S. dollars as currency reserves around the world after the Brenton Woods Conference(1944). This created a situation of us exchanging dollars for goods around the world because the dollar was what their central banks required to create more of their own fiat currency.
Thanks! It was a very clarifying dialogue.