Does Currency
In response to the Great Recession of 2007- 2009, central bankers of various nations adopted expansionary
However, in the years following the Great Recession, things did not turn out exactly like economic theory predicts. Why? Recent evidence suggests that a fundamental change has occurred in the structure of international trade that reduces the impact of a depreciating currency on trade flows. What has changed is where businesses source the things, they need to produce the goods they export. In the past, manufacturers found most components needed to produce their goods at home. Now they increasingly look abroad for such inputs. As a result, exports now incorporate a lot more imports. This means that many products are no longer "made in the United States" or in another particular country. Instead, they are "made in the world."
It is still the case that when a currency such as the yen depreciates, it reduces the price of goods sold by Japanese producers in the United States. But it also increases the price of the things that Japanese producers import to make those exported goods. Therefore, the production costs of Japanese producers increase and the competitiveness of their export’s declines. As a result, depreciating currencies have a smaller effect on exports.
Economists at the Organization for Economic Cooperation and Development and the World Trade Organization have measured the impact of global supply chains on trade flows. In particular, they measured how much foreign content there is in each nation's exports, finding a sizeable increase since the mid-l 990s. For example, the foreign content of Switzerland's exports increased from 17.5 percent in 1995 to 21.7 percent in 2011, while the imported content of South Korea's exports almost doubled, from 22.3 percent in 1995 to 41.6 percent in 2011. Using these figures, these economists found that the effect of currency movements on exports and imports has fallen over time, by as much as 30 percent in some countries. The implication of these findings is that as countries become more vertically integrated via global value chains, exchange rate variations will have a diminishing impact on trade flows. Thus, currency fluctuations will have a smaller role as shock absorbers that direct global demand toward weaker economies from stronger economies.
Japan provides an example of how large currency depreciations do not deliver the export boost they once did. In 2013, the Bank of Japan enacted a massive stimulus program that increased the supply of yen and resulted in the currency's steep depreciation against the dollar and the euro. That strategy was a main component of Japan's arsenal of measures designed to boost the economy out of a long period of stagnation. But what followed was that the yen 's depreciation had negligible effect on Japanese exports, thus failing to jump-start economic growth.
A similar pattern emerged following the European Central Bank's decision to enact its expansionary monetary policy in 2015 to boost economic growth by aiding exports. But once again, the impact of a weakened euro was modest.
Simply put, the extent to which currency movements increase or decrease exports depends on how large their foreign content is. For the world economy as a whole, the foreign share of U.S. exports is at the lower end of the global range, at around 15 percent, compared with more than 25 percent in Germany.
[Sources. Paul Hannon, "Why Weak Currencies Have a Smaller Effect on Exports," The Wall Street Journal, December 28, 2015; Organization for Economic Cooperation and Development, Measuring Trade in Value Added: An OECD-WTO Joint Initiative, October, 2015; World Trade Organization and the Institute of Developing Economies, Trade Patterns and Global Value Chains in East Asia, 2011; Albert Park, Gaurav Nayyar, and Patrick Low, Supply Chain Perspectives and Issues: A Literature Review, World Trade Organization and the Fung Global Institute, 2013.]
Question:
- In your opinion, does currency depreciation solve the economic problems of a country? Justify your answer.
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