Sunday, May 18, 2008

Hey, Economics People

Just wondering... what are the most important consequences of the weak dollar, and what are the best ways to deal with it?

I can see some of the effects... obviously it made my purchasing power in Canada a lot lower, and for commodities like oil, if the U.S. dollar is weak, then we're paying more vs. the countries with stronger currencies. What about more long-term effects like those on the national debt? How does it affect that? I can't imagine it's good. And what about secondary effects?

I suppose there are also some positive aspects of it, too, if you're working in the domestic tourism industry. What about manufacturing? It makes goods more expensive for us, but conversely, I suppose, this would encourage companies to keep factories in the U.S.

So anyway, at this point, all I know are little tidbits. Could anyone out there help me with a more comprehensive understanding of the subject?

2 Comments:

At Monday, May 19, 2008 at 7:02:00 AM PDT, Blogger Ted said...

Since I get paid to be an economist, I guess I'm obligated to respond. :) Disclaimer: I'm not a specialist in macroeconomy, so you're going to get a micro-oriented viewpoint here.

I think you pretty much summed it up. There are advantages and disadvantages to having strong or weak currency, and, as with most problems of this type, different people will benefit from each. Basically, the weak dollar obviously favors exports. It makes going to Europe suck -- but there's a huge business right now of people taking weekend trips from London to New York just to go shopping.

Personally, I like a stronger dollar, because I tend to consume imported goods, and travel internationally a good bit. (I've already noticed the price of Stoli seems to have gone up a lot this year...) But, I don't think there's a strong policy argument one way or the other for what's best for the country as a whole.

Finally, worth a note: when we talk about the dollar being "strong" or "weak," we're comparing the dollar today against the dollar historically. We *aren't* comparing, say, the dollar versus the euro specifically, because there's no meaningful way to make that comparison. The "right" exchange rate may be different over time as conditions change. Getting fixated on certain exchange rates being "normal" -- e.g., one euro per one dollar, or one US dollar per 327 Canadian dollars -- is suboptimal and may be dangerous.

 
At Wednesday, May 28, 2008 at 10:32:00 AM PDT, Anonymous Anonymous said...

Ted,

I read your comment to Adam's post (great questions by the way, Adam) with interest. Thank you for not using jargon, and being clear.

Could you please say more about the last paragraph? When you say comparing the dollar now against the dollar historically, what is the basis for this comparison? Why can't a comparison be made across currencies (say, change in strengh of dollar, measured against change in strength of euro), to get relative movements between currencies?

Thank you,
Eileen

 

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