Re: Trade policy

[paul davidson <pdavidson@xxxxxxx>]

At 08:14 PM 4/28/03 , Leigh wrote:


> I  We all "know" that the
> floating exchange rate system is the better system.


WHO IS THIS "WE" THAT KNOWS THIE FLEXIBLE EXCHANGE RATE ASYSTEM TO BE THE
"BETTER SYSTEM".

THE "WE" CAN NOT INCLUDE KEYNES NOR MYSELF.

 AND IF YOU UNDERSTOOD THE MARSHALL-LERNER CONDITION REGARDING TRADE IS
NOT LIKELY TO BE EFFECTIVE IN THE SHORT RUN  -- AND THAT FREE CAPITAL FLOWS
CAN BE HORRIBLY DISTRUCTIVE UNDER A FLEXIBLE EXCHANGE RATE SYSTEM -- YOU
TOO MIGHT OPT-OUT OF THIS "WE" GROUP.



>   But it does have a few
> side effects that we choose to ignore.
> Strangely, success has been the reason for the "dead bodies".   That is,
> when countries succeed at raising our exports, they must increase imports
> simultaneously, by the same amount.  This is achieved through the exchange
> rate system.  The value of the currency rises to make imports cheaper, so
> that domestic consumer buy more.


Obviously you are assuming the Marshall-Lerner condition is universally
applicable.




> The higher value of the currency has two effects: it not only makes imports
> cheaper; it reduces the incomes of exporters.

 if the demand for there exports is inelastic--  then what happens to the
income of exporters?


paul