Floating Exchange Rate, Currencies Down and Up
An economic theory; why currencies up and down, fluctuate
Before I go on, let make sense with an assumption, the currency must floating exchange rate (no official exchange rate) so a simple illustration will works well.
Imagine there are two currencies, Yen Japan and Dollar (USD). Another assumption is no speculation motive.
For example, when Japan have surplus on trade against America, Yen will appreciate because they hold more Dollar. So more dollar in Japan implicate more money supply otherwise American lost their Dollar, so we can say less dollar in America–money supply will decrease. Dollar begins cheaper on Japanese.
Economics thought that increasing in money supply will causes inflation, and America begins deflation. Another theory said that when Dollar in America less, mean they have ability to buy down. In international trade, when Japan won against America, Japan goods couldn’t brought by American because they have no money, otherwise Japanese have more ability to buy.
The simple impact is Japan reduces their surplus against America. Many tools taken by Japan, the one is buying American goods (American has no ability to buy, so the producer put the price down). While Japan buys more American products than American, international trade shows that American get surplus. The process still continues as long as international trade is.
That is a simple illustration, but the reality shows different. Let us see Japan does when surplus condition. In next news and opinion, I will tell about the reality. Why the economic theory doesn’t work on this case.
Actually the illustration is not an illustration, more over in reality Japan does. So how does Japanese do with their surplus (inflation maker) in order to stabilization their inflation and their exchange rate?
read related posted,
Psychology of $$$ USD on Jacky’s Opinion
