last minute doubt - GDP and currency indirectly, currency, related, minute

hanvinh

Is GDP directly or indirectly related to currency (appreciation) if so why?

Benjiko

because of the net export component of GDP.
If currency appreciates

export decreases because foreigners have to pay more and import decreases as foreign goods are cheaper -- net export decreases, reducing aggregate demand.

Opposite holds for currency depreciation.

Hope this makes sense

suyash1989

wouldn't imports increase when the home currency appreciates? since foreign goods become cheaper?

rgonzalez

sorry import increases and export decreases

ajpheif16

which would decrease net exports as well...

shootingstar

I'm reading page 144 of SN (econ):

They are saying that base currency appreciation will cause exports to decrease and imports to increase, thus decreasing aggregate demand.

Based on the AD formula: AD= C + I + G + (X-I) ,

They must be assuming that X will decrease more than the increase in I otherwise they would offset and AD would be unchanged. Opposite is true for base currency depreciation.

What is the logic behind this assumption that X is affected more by currency appreciations/depreciations than I?

Jolyn

Basically GDP UP tends to imply that the currency rises. However, the key driver you should be thinking about is Net Exports (NX = Exports - Imports)

If Net Exports goes up, this indicates greater demand for the currency by outsiders, and drives the currency upwards. So NET EXPORTS UP ==> Currency UP

If other parts of the economy are unchanged, then GDP UP ==> Currency UP

This is because Y = C + G + I + (Net Exports)


It is possible that a stronger currency could mean that some domestic industries are no longer competitive and imports increase, so if the currency rises too high, there will be pressure to bring it back down. Net exports will decrease because people are importing more and because exports are more expensive to outsiders. This is a second order effect, however, because it takes longer to get into the economy.

But the first order effect is that as Net Exports rises, Currency rises.

Does generic GDP growth produce a Net Export rise? Usually. If we are producing too much for ourselves, companies will generally try to find export markets for goods.

nitoha

bchadwick - great clear explaination - Thanks