Econ 101 for Washington Post Reporters

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Wednesday, 10 November 2010 05:44

One would hope that reporters who cover economic issues for the Washington Post know a little economics. Unfortunately, this does not seem to be the case. Therefore, BTP will provide a free economics tutorial for the Post's economic reporters.

The Post told readers today that:

"world leaders share the overall aims of bringing trade flows into better balance and curtailing recent clashes over currency values."

The whole piece in fact shows the opposite. In a system of floating exchange rates the mechanism for correcting trade imbalances is a change in currency values. Countries with trade surpluses are supposed to see the value of their currency rise. Countries with trade deficits are supposed to see the value of their currency fall.

When a country's currency falls in value, imports become more expensive meaning that they will import less. Its exports become cheaper for people in other countries, causing foreigners to buy more of their exports. This will reduce its trade deficit. The opposite holds for a country's whose currency rises in value.

This is really simple. If you want to see trade imbalances corrected, then you want to see the value of the currency fall for countries with large deficits like the United States. This is just like if you want the school fire put out, you want the firefighters to spray water on it.

On the other hand, if you don't want the firefighters to use water, then you really don't want the fire extinguished. In the same vein, all the officials cited in this article who complain about the decline in the value of the dollar obviously do not want the trade imbalances corrected. It is that simple, at least for folks who learned intro econ.

There is another interesting sidebar for the economically literate. The article tells us:

"Some developing countries took aim at the Fed move in part because it could weaken the dollar, making their own currencies relatively more expensive, hurting their exports and fueling inflation."

This is a non sequitur. If the dollar falls in value, then imports from the United States will be cheaper for developing countries. This will lower inflation, other things equal. In addition, reduced exports from these countries will also reduce domestic demand and employment, which will also put downward pressure on inflation. If developing countries actually make the claims attributed to them in this article then the news is that their officials have no better grasp of economics than a Washington Post reporter.