4 ms·

What does ‘ exchange rates can't stabilize the balance of trade’ mean?

AnimalMuppet 2y ago
If the US is trading with the EU, say, and the US is importing too much and exporting too little, eventually that affects the exchange rate between the dollar and the euro. That adjusts in a way that somewhat counteracts the trade imbalance. But if Portugal imports too much from France and exports too little, and they're both using the euro, then there is no exchange rate to adjust, and so you're just left with the trade imbalance and no adjustment.
- moffkalast 2y ago
  So what, the exchange rate in that case would change so US consumers lose buying power for EU imports as a sort of automatic customs fee and as a result would prefer locally made alternatives? I would question how well that works outside completely generic goods that you can buy anywhere, since with economies of scale consolidating production there is often hardly any alternative anymore. Also, feels like there could be a way to manually address the balance without reducing people's standard of living.
  - whatshisface 2y ago
    The balance is not maintained for individual goods, but rather for the whole market. If the EU is better than the US at manufacturing everything, the exchange rate will fall until the US can at least do one thing cheaper. Exchange rates don't help raise people's standards of living, but they do prevent countries from becoming economic dead zones.
- MichaelZuo 2y ago
  But there is an adjustment in the total wealth owned in aggregate by those in Portugal vs. France, which is what’s important at the end of the day, right? Eventually those in Portugal will not have enough wealth to import above their exports, depending on how much stored wealth they have in aggregate. So it’s still guaranteed to balance out on a century timescale…
  - deleted 2y ago
    [deleted]
  - s1artibartfast 2y ago
    The end states are different however. >So it’s still guaranteed to balance out on a century timescale… Balance in what sense? In terms of trade, countries can perpetually run a deficit if they share a currency. Wealth isnt zero sum and is continually created. This can be used to pay a perpetual deficit at a cost to growth.
    - MichaelZuo 2y ago
      Isn’t it the relative level that decides the balance between imports and exports? Not the absolute level of wealth?
      - s1artibartfast 2y ago
        relative level of what? I dont understand your question.
        MichaelZuo 2y ago
        Relative level of wealth available for importing…
        s1artibartfast 2y ago
        I see. Even if you have little wealth, I dont mind taking it all. It just means you cant buy much. Imagine of two families. Whenever one gets money, it buys food from the other. The 2nd keeps taking the money and investing in their garden, making it bigger and more efficient. IF they share a currency,
        MichaelZuo 2y ago
        How can their be a ‘perpetual deficit’ in this case? Or in the case of Portugal and France trading? Eventually one party will exhaust all their available resources, be that money, gold, desirable trade goods, trust, credibility, etc… and won’t be able to run a deficit anymore.
- HarHarVeryFunny 2y ago
  Exchange rates are determined by markets based on supply and demand, with demand being based on things like investment opportunity, as well as structural demand such as for petro-dollar oil payments. Currency markets are mostly too big for governments to be able to manipulate (e.g. George Soros & GBP).
  - whatshisface 2y ago
    The market can adjust the exchange rate between the US and the EU, but not between the Portugal and Spain. This is in a sense the ultimate in government currency control, and if 1:1 is not the exact ratio that the market would have set, one of the two countries will be emptied out.
    - HarHarVeryFunny 2y ago
      If the Portuguese economy was booming relative to Spain, then "the market" (investors) can still take advantage of that by investing in other Portuguese assets such stocks and real estate. If a government wants to address a trade imbalance then import tariffs is one way to do it - or policy changes affecting cost of goods produced for export.

If the US is trading with the EU, say, and the US is importing too much and exporting too little, eventually that affects the exchange rate between the dollar and the euro. That adjusts in a way that somewhat counteracts the trade imbalance. But if Portugal imports too much from France and exports too little, and they're both using the euro, then there is no exchange rate to adjust, and so you're just left with the trade imbalance and no adjustment.

moffkalast 2y ago
So what, the exchange rate in that case would change so US consumers lose buying power for EU imports as a sort of automatic customs fee and as a result would prefer locally made alternatives? I would question how well that works outside completely generic goods that you can buy anywhere, since with economies of scale consolidating production there is often hardly any alternative anymore. Also, feels like there could be a way to manually address the balance without reducing people's standard of living.
- whatshisface 2y ago
  The balance is not maintained for individual goods, but rather for the whole market. If the EU is better than the US at manufacturing everything, the exchange rate will fall until the US can at least do one thing cheaper. Exchange rates don't help raise people's standards of living, but they do prevent countries from becoming economic dead zones.
MichaelZuo 2y ago
But there is an adjustment in the total wealth owned in aggregate by those in Portugal vs. France, which is what’s important at the end of the day, right? Eventually those in Portugal will not have enough wealth to import above their exports, depending on how much stored wealth they have in aggregate. So it’s still guaranteed to balance out on a century timescale…
- deleted 2y ago
  [deleted]
- s1artibartfast 2y ago
  The end states are different however. >So it’s still guaranteed to balance out on a century timescale… Balance in what sense? In terms of trade, countries can perpetually run a deficit if they share a currency. Wealth isnt zero sum and is continually created. This can be used to pay a perpetual deficit at a cost to growth.
  - MichaelZuo 2y ago
    Isn’t it the relative level that decides the balance between imports and exports? Not the absolute level of wealth?
    - s1artibartfast 2y ago
      relative level of what? I dont understand your question.
      - MichaelZuo 2y ago
        Relative level of wealth available for importing…
        s1artibartfast 2y ago
        I see. Even if you have little wealth, I dont mind taking it all. It just means you cant buy much. Imagine of two families. Whenever one gets money, it buys food from the other. The 2nd keeps taking the money and investing in their garden, making it bigger and more efficient. IF they share a currency,
        MichaelZuo 2y ago
        How can their be a ‘perpetual deficit’ in this case? Or in the case of Portugal and France trading? Eventually one party will exhaust all their available resources, be that money, gold, desirable trade goods, trust, credibility, etc… and won’t be able to run a deficit anymore.
HarHarVeryFunny 2y ago
Exchange rates are determined by markets based on supply and demand, with demand being based on things like investment opportunity, as well as structural demand such as for petro-dollar oil payments. Currency markets are mostly too big for governments to be able to manipulate (e.g. George Soros & GBP).
- whatshisface 2y ago
  The market can adjust the exchange rate between the US and the EU, but not between the Portugal and Spain. This is in a sense the ultimate in government currency control, and if 1:1 is not the exact ratio that the market would have set, one of the two countries will be emptied out.
  - HarHarVeryFunny 2y ago
    If the Portuguese economy was booming relative to Spain, then "the market" (investors) can still take advantage of that by investing in other Portuguese assets such stocks and real estate. If a government wants to address a trade imbalance then import tariffs is one way to do it - or policy changes affecting cost of goods produced for export.