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Well, simply put, we don't live in a single economic regime. If inflation is much higher in one country than another, then exports from the country with lower

by ra 13y ago

Well, simply put, we don't live in a single economic regime. If inflation is much higher in one country than another, then exports from the country with lower inflation will be more competitive on the global market. Inflation also alters consumer behaviour. If inflation is very high people tend to buy goods way in advance for fear of further price increases. This "bringing forward" of consumer spending means less will be consumed in the months ahead. The general uncertainty created by very high inflation undermines business confidence and reduces investment. Basically, you're money is better off in another country where inflation is lower.

nhaehnle 13y ago
If inflation is much higher in one country than another, then exports from the country with lower inflation will be more competitive on the global market. Depends on what the inflation actually does. For global trade, it's only relative prices that matter. If relative prices did not change in the inflation, the exchange rate would adjust and that's all that would happen. This is because exchange markets react much faster (orders of magnitude) than export/import markets. If the inflation reduces the real wages of workers in the country, then high inflation actually means that the country's exports will become more competitive. (But the workers in that country might not like it... so much for the benefits of "competitiveness"). As to the question about international investments, let me put the caveat that most of what people talk in that arena is nonsense. That said, even accepting some of the rather absurd premises: it is still a question of relative prices. If you have 0% inflation domestically, but also 0% interest, then perhaps you may want to put that money in an account abroad where you have 5% inflation but get 8% interest. Again, it is not the high inflation itself that makes investment unattractive. Volatile inflation is another beast, but stable and high inflation has so far not been shown to be a problem. Also note that in your last paragraph, you simply rephrased your original claim without giving an argument.

by ra 13y ago

nhaehnle 13y ago

If inflation is much higher in one country than another, then exports from the country with lower inflation will be more competitive on the global market. Depends on what the inflation actually does. For global trade, it's only relative prices that matter. If relative prices did not change in the inflation, the exchange rate would adjust and that's all that would happen. This is because exchange markets react much faster (orders of magnitude) than export/import markets. If the inflation reduces the real wages of workers in the country, then high inflation actually means that the country's exports will become more competitive. (But the workers in that country might not like it... so much for the benefits of "competitiveness"). As to the question about international investments, let me put the caveat that most of what people talk in that arena is nonsense. That said, even accepting some of the rather absurd premises: it is still a question of relative prices. If you have 0% inflation domestically, but also 0% interest, then perhaps you may want to put that money in an account abroad where you have 5% inflation but get 8% interest. Again, it is not the high inflation itself that makes investment unattractive. Volatile inflation is another beast, but stable and high inflation has so far not been shown to be a problem. Also note that in your last paragraph, you simply rephrased your original claim without giving an argument.