Re: Fixed vs. flexible exchange rates

[pdavidso <pdavidso@xxxxxxx>]

>===== Original Message From Warren Mosler <mosler@xxxxxxxxxxxxxx> =====
>--- pdavidso <pdavidso@xxxxxxx> wrote:
>> >===== Original Message From Warren Mosler
>> <mosler@xxxxxxxxxxxxxx> =====
>>
>>
>> No the Marshal Lerner assumes that exporters of
>> manufactured goods and
>> services still sell at the same domestic price as
>> before.
>
>Right, which would be a lower 'world price' as
>the assumption here is the local currency depreciated?

Yes and if the price elasticity of demand is inelastic then total export
earnings declines even though physical exports increase -- a cost to the
domestic economy in your terminology; if the price elasticity is unity, total
export earnings is unchanged after depreciation while physical exports
increase - a cost in your system; only if the price elasticity is elastic will
export earnings increase -- but if the price elasticity is not much greater
than unity, the increase is very small -- only if the price elasticity is
close to infinite -- the case of many international primary producers of a
homogeneousase significantly. product will thee export earnings incre
>
>
>
> 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.
>
>right.  when you can be price setter, go for it!
>Otherwise you are a price taker, and the level of your
>local currency doesn't matter to international buyers.

Going for it -- does not help the country's trade (and current
account)imbalance - for5 the monopolist was "going for it " even before
depreciation.
>
>>
>> >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.

A price taker means what?? Basically that the producer has no possibility of
effecting price by any actions he/she undertakes -- but that requires a purely
competitive market -- something that occurs internationally only in
homogeneous primary products where no cartel exists.  How many markets is
that?
>>
>> 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.
>
>Understood.  I'm saying that to sum to less than
>unity, in the face of constant world prices and
>depreciating local currency, local exporters are
>either selling below world prices, which shouldn't
>be the case, or are in fact price setters have opted
>to sell at lower world prices for whatever reason.

No!! No!! what you are saying is a violation of the absence of the
Marshall-Lerner condition.  Talking of a "world price" implies a homogeneous
product produced by many producers internationally -- no one producer can
AFFECT the world price no matter what production decision each producer makes
independently!!


In international trade most homogeneous primary products "world prices" are
always quoted in US dollars -- espcially since the global payments system is
on a dollar standard

>Note, additionally, that a coun try that at the macro
>level could be a price setter, like maybe Brazil in
>coffee at one time, if it lets its local coffee
>producers compete with each other for export markets
>may instead find itself lowering the world price it
>charges when the local currency depreciates.

Aain all you are talking about the possible case of pure competition where the
price elasticity is close to infinite.

  I
>suspect that's driver behind the real world evidence
>of ml type conditions that show currency depreciation
>hurting terms of trade.  But the remedy for that is
>not currency support measures, but 'organizing' your
>local exporters in the national interest.

A CARTEL in only one producer?  Would you suggest that Saudi Arabia merely
monopolize its production of crude oilo -- as it has -- and ignore what other
oil producing nations do?
>
>> >
>> >If the country is a price setter, it just needs
>> >organization to make sure it's terms of trade are
>> >maximized.

That may be true but has nothing to do with the questiopn of whether a
depreciation improves the trade payments balance --which is where this whole
discussion started.


>> >

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