Monday, March 9, 2009

Strong Dollar in a Recession

This post relates to the following Keystone Economic Principles:

6. Do what you do best; trade for the rest.
9. Prices are determined by the market forces of supply and demand…and are constantly changing.

When discussing the current economy, the focus frequently turns to the basic economic equation:

Consumer spending + Investment spending + Government spending + (exports - imports) = Gross Domestic Product (GDP).

The idea in a downturn is to increase GDP. Therefore anything that leads to a reduction in GDP must be bad, right? Well, we're reminded that President Truman searched in vain for a one-armed economist because he was tired of hearing "on the one hand...but on the other."

Here's a story from National Public Radio (NPR) that offers another example. The subject of the story is the strength of the dollar in international markets. The quick connection is that a strong dollar is better for importers (we get more for less) and less so for exporters (it costs foreign nations more of their currency to buy our products). This means that (exports - imports) trends farther to the negative, reducing GDP.

But here's the "other hand". Given the massive amount of deficit spending generated by the stimulus package, the government needs to borrow. If the government is going to borrow, it stands to increase its ability to borrow if the debt is denominated in a strong currency. It's an interesting argument and worth introducing into your classroom discussion.

I look forward to your thoughts/comments on the story.

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