i’m kinda lost on this statement. “A [real] depreciating currency places upward pressure on domestic prices as the cost of imports increase and foreign competition in the domestic market is reduced.” When domestic currency decreases, the purchasing power decreases, exports go up. Why do the COST of imports increase?
If domestic currency is decreasing, you are correct that exports should eventually rise, because the exchange rate makes it attractive for foreigner’s to buy it. This is the same mechanism of why imports would be expensive.
Because you’re still importing products (albeit a small amount of products) and paying the price at a higher foreign currency.
pacmandefense Wrote: ------------------------------------------------------- > i’m kinda lost on this statement. > > “A depreciating currency places upward pressure > on domestic prices as the cost of imports increase > and foreign competition in the domestic market is > reduced.” > > When domestic currency decreases, the purchasing > power decreases, exports go up. Why do the COST of > imports increase? you said it … ‘purchasing power decreses’ so you buy less with the same amount. costs increase.
oh, alright. two sides of the same coin…
If im not mistaken, that is the “Short Run” – effect of currency depreciation, The imports will decrease & exports will rise until the new terms of trade are negotiated, until then the cost of exports will rise This interim period between which the new terms are negoitiatied is marked by the same quantity of exports but at a relatively higher price, Does this make sense?
it is in the short run because you sell at higher price in domestic currency and same price in foreign currency… that only happens until domestic producer adjusts prices to reflect inflation (the depr of currency)
correct me if im wrong… the world price (foreign country or foreign price) always prevails if it is HIGHER, so if the value of the domestic currency ($) depreciates, the exports rise, and the domestic prices will rise to converge with the world price because the domestic producers will not sell for less than world price.