CEPR - Center for Economic and Policy Research

Multimedia

En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press The NYT Never Heard of Floating Exchange Rates

The NYT Never Heard of Floating Exchange Rates

Print
Sunday, 17 April 2011 20:13

The NYT warned readers that inflation in China "poses big threat to global trade." The article is not very coherent, but it seems that the main potential threat to global trade would be that inflation in China could raise the price of its exports, making them less competitive. From the standpoint of the United States, this would mean that we might buy fewer goods from China, replacing them either with good purchased elsewhere or domestically produced goods.

While replacing imported goods with domestically produced goods reduces global trade, it also increases net exports in the United States (net exports are equal to exports minus imports), thereby increasing GDP and creating jobs. It would have been worth pointing this fact out. Most readers would probably consider increased employment and growth to be more important than increased trade.

It would have been worth mentioning that China's problems with inflation could be largely prevented if it just let its currency rise instead of spending trillions of dollars to keep down the yuan against the dollar and other currencies. A higher valued yuan would reduce inflationary pressures through two channels. First it would make imports cheaper, thereby putting downward pressure on the price of a wide range of products.

The other effect that a higher valued dollar would have is that it would slow China's economy by reducing its exports. This is exactly what China's central bank has been attempting to accomplish by raising interest rates and reserve requirements.

The natural tool for combating inflation in an economy with floating exchange rates is a rise in the value of its currency. It would have been appropriate to discuss currency values in the context of this article.

This article also includes the assertion that China had a $4 trillion stimulus package. Most accounts put its stimulus package in the range of $600-$800 billion, less than one fifth this size.

Comments (4)Add Comment
Chinese Inflation and The Wal Mart Revenge: How Sweet It Is
written by izzatzo, April 17, 2011 11:08
While replacing domestically produced goods with domestically produced goods reduces global trade, it also increases net exports in the United States ...


This is your chance America. Strike while the iron is hot with domestic inflation in China. Turn that Wal Mart Greeter job into an American Manufacturing job.

Turnabout is fair play. It's time to fill up the shelves of Wal Marts in China with appliances, tools and household goods made in the good old US of A.

Somebody call Paul Ryan and Jeffrey Immelt and tell those bastards they're fired. The heat in the kitchen from some real 'competition and choice' just got too hot for them to survive.

Let them offshore themselves to China and get a taste of real competition and choice while earning their true worth by competing with other beggars to wipe down windshields in the street on the nice Buicks there, especially the ones made by commie unions in the USA.
...
written by kharris, April 18, 2011 10:24
"While replacing domestically produced goods with domestically produced goods reduces global trade..."

Nope, replacing domestically produced goods with domestically produced goods doesn't change global trade at all. Replacing goods produced elsewhere with domestic goods reduces global trade some, a bit, but don't forget those parts.
...
written by Dan, April 18, 2011 10:53
"The other effect that a higher valued dollar would have is that it would slow China's economy by reducing its exports."

I think you mean yuan.
...
written by Benjamin Moodie, April 19, 2011 1:11
Thanks for this post. I also felt like the NYT article was unusually bad. It seemed to go out of its way to emphasize every conceivable "risk" associated with Chinese inflation while eschewing an examination of any potential benefits to China's trading partners.

Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.

busy
 

CEPR.net
Support this blog, donate
Combined Federal Campaign #79613

About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

Archives