Re: Fixed vs. flexible exchange rates

[pdavidso <pdavidso@xxxxxxx>]

>===== Original Message From Warren Mosler <mosler@xxxxxxxxxxxxxx> =====
>
>So you are assuming that exporters don't sell at
>'world prices' but when their local exchange rate
>falls sell at lower prices?  Fine, that's called
>deteriorating terms of trade.  That's a different
>assumption.

No the Marshal Lerner assumes that exporters of manufactured goods and
services still sell at the same domestic price as before.  The exception is,
as I pointed out in an earlier email to the pktnet, is for small nations that
are producers of homogeneous primsry goods that can be produced lots of other
places globally.  In that case then the price elasticity of demand for exports
is close to infinite -- the usual example of a purely competitive model-- and
of course then the Marshall-Lerner Condition is applicable.  Of course
producers understand that and therefore most international primary goods
producers form cartels to protect themselves against the inelastic price
elasticity ,e.g., OPEC.

>Here's the rub.  Assuming the country in question is a
>price taker, I'd say the causation runs from
>deteriorating terms of trade to currency adjustment,
>not vice versa.  And that has nothing to do with
>full employment.  It is a shift in relative value of
>traded goods and services.

No what the Marshall-Lerner condition says if the sum of the price elasticity
for all imports together and exports together sum to less than unity  -- as
Henry explained -- then depreciation of currency worsens the balance of
payments on goods and services accounts -- and that isw true no matter what
you say about the terms of trade.
>
>If the country is a price setter, it just needs
>organization to make sure it's terms of trade are
>maximized.
>

or form a cartel???

Paul

Paul Davidson
Editor, Journal of Post Keynesian Economics
University of Tennessee
SMC 503
Knoxville, Tennessee 37996-0550
office phone #;(865)974-4221; office fax# (865)974-1686 or (865)974-4601
home phone and fax # (865)692-0802
email pdavidson@xxxxxxx
http://econ.bus.utk.edu/davidsonextra/Davidson.html