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The Value of Money

Journal Entry: Fri Apr 10, 2009, 12:15 AM
  • Mood: Sweet
  • Listening to: Mushroomhead - Erase the Doubt
  • Reading: The Wealth of Nations
  • Watching: Quantum of Solace
  • Playing: Call of Duty 4
  • Eating: Taco Dip
  • Drinking: Barq's Root Beer
Alright, one thing that is a constant annoyance to me: people complaining that the American dollar has devalued, and thus indicates something negative. The fact is this: a low-valued currency does not intrinsically mean a bad economy, or that GDP will suffer. Is Japan's economy one of the worst in the world because the Yen is such a low-value currency? No, Japan has the second largest economy on the globe, and it also has to do with their low-value currency.

The value of a nation's currency has a direct relationship to how the country trades. Traditionally America has enjoyed a high-valued currency, and they have a huge trade deficit, very high imports. Japan has a low-valued currency, with an extraordinary amount of production and exports. This is not a coincidence. In fact, some nations even artificially keep their currency as low as possible so as to encourage exportation.

If Country X has a high-valued currency in relation to the rest of the world, they enjoy a good exchange rate to other currencies, and therefore get a benefit from importing goods. On the other hand, exports in Country X will decline, because it costs more to sell stuff to other nations, those nations have to pay more for Country X's goods than X citizens do for their goods.

However, if Country Y has a lower-valued currency than other trading nations, importing costs more. The exchange rate is not in their favor, and more costs will be paid to import foreign goods. Exporting becomes the advantage; Y suppliers can sell products for cheaper in foreign markets than the other nations can.

That being said, it is worse for the average consumer when the value of their domestic currency falls. Their real income technically falls because their money is worth less, and they are technically worse off individually. However, it also means that exporting will be up, and new production facilities will be built in that country. Foreign Direct Investment will see an increase as it is favorable for foreign countries to invest in capital and build in the nation with the lower currency. We can see it around the world with high-value capitalist country building factories in low-value nations. Foreign Direct Investment has risen tremendously in the United States as the value of the currency has fallen, importation is down, and exports are up. New factories are being built.

So look at the big picture before you decide that having a low-value currency is automatically detrimental. What it really causes is a shift in jobs and money in the economy, not necessarily a decline in output or worth. The trade deficit is closing quickly as Americans import less and export more. On that note, anyone who complains about a large trade deficit and then complains when there is a low-value currency needs to take another look, because these are naturally inversely related. One goes up, the other goes down. Jobs are being created in the United States at the same time as jobs are being lost in other sectors.

That's not to say the American economy hasn't seen decline, it most certainly has. The devaluation of the currency, however, has little to no impact on the overall GDP and employment.




Devious Info

  • Current Residence: Chicago
  • Interests: No sex until marriage
  • Favourite genre of music: Hard Rock, Metal
  • Operating System: Windows 7 Beta
  • MP3 player of choice: Microsoft Zune
  • Favourite game: Call of Duty 4
  • Favourite gaming platform: XBox 360
  • Favourite cartoon character: Gabe
  • Tools of the Trade: My computer!

Comments


You have a nice economy. :eyes:

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