Do imports drive the buying power of fiat currency up or down?
It seems to me that they should be driving it up: you take out paper out of an economy and exchange it for goods. Less paper = deflation => prices go down.
Am I missing something?
Well, I don’t quite understand your argument. The paper isn’t being “taken out” of the economy, it’s just being held in the hands of foreigners. What will they do with it? They can save it, spend it on American goods, or spend it on foreign goods. These are precisely the three things an American can do. So in what sense have the dollars left?
I was discussing this with a friend, that’s how I got the idea for the topic.
He claimed when we import, we give away resources (money) to other countries, and somehow this devalues currency (because there is less money) and it drives prices of other products up.
Then those cars require gasoline which we also import, and somehow this too drives other prices up.
What a silly argument. No, the goods being bought, other things being equal, become scarcer, and dollars (say this is the domestic currency) become rarer in the importing country, pushing their purchasing power up, not down.
-Jon
That’s what I said too, when we import stuff, other things should be become cheaper, not more expensive.
A friend of mine, economist, said that when we buy foreign money, our currency loses buying power, but I fail to see how!
It should be exactly the opposite: presuming extra paper won’t be printed, what we do is we give our paper to foreigners and thus it becomes a scarcer => the remaining paper should become more valuable.
Am I missing something?
Again, why? If you hand paper to foreigners, they don’t want it for wallpaper, they want it to buy American goods, or to trade with others, who will then use the money to buy American goods, or…etc. In what sense is the money gone? What makes it rarer?
It’s no longer in the “pool” of free-flowing currency. Just like stashing it under the mattress. Until you take it out, it’s as good as gone.
What is your opinion on what happens to the value of currency on imports/exports?
As a businessman, if I learn that people are stashing money under their mattresses, and treat that money as “gone” and thereby decide I need to lower my prices, I’ve made a poor business decision. Instead, I should conclude that people stash money under their mattresses because they are saving up for something in the future, and realize that the money will eventually be invested or spent. I don’t treat it as if it vanished.
With foreign trade, though, it’s not even like the mattress. Here the money isn’t even gone in the same sense as it is with the mattress. A Frenchman can sell cheese, receive dollars, and 5 minutes later spend those dollars on a hamburger. It’s not tied up at all. Would you count money in my wallet as being outside the “pool” of free-flowing currency? How about in my bank account? Savings account? CD? Only if you’re committed to a neoclassical concept of “velocity” which is equally absurd.
I think the answer to the question regarding imports and exports has more to do with the fed than any economic effects. If Americans buy things outside the country, the fed will tend to inflate, lowering the value of the currency.
What would happen if there was no fed to step in and mess things up?
How would (1) imports (2) exchanging your currency for foreign currency affect the value of your home currency?
As of now (I’ll be entering grad school soon, so maybe I’ll be clued in then) I don’t see that it would affect the value of my home currency. I’m open to arguments that it would, though, if you can explain how.
The same discussion emerged again on national television today: a “top” politician said it’s “sad that we have to imports stuff rather than make it ourselves”.
In a free market, would it be any advantage if a country produces stuff inside it’s borders rather than importing it from elsewhere?
I already addressed the notion of “national economy” in this thread: National Economies - #2 by nhaag
Basically, in a true free market, the distinction “our economy” / “their economy” is irelevant.
Does it make a difference in the non-free market (what we have now) ?