10. Exports and Imports, Real Exchange Rates

Source: World Trade Organization, International Trade Statistics 2010. https://​www.​wto.​org/​english/​res_​e/​statis_​e/​its2010_​e/​its10_​toc_​e.​htm. Accessed September 20, 2012. Note that when counting net cross-border movement of goods and services in the world as a whole, Country A’s export is Country B’s import. Thus, for this purpose one normally counts total exports in order to eliminate the double-counting aspect. Note also that due to varying methods of reporting the value of traded merchandise (inclusive or exclusive of freight), there is some double-counting of transportation charges in the merchandise and services totals. Thus, they cannot be aggregated for a truly accurate total trade figure.

Inflation will be incorporated into our ISLM-BOP model in the next chapter.

Milton Friedman’s famous dictum.

From the Louvre Accord: “10. The Ministers and Governors agreed that the substantial exchange rate changes since the Plaza Agreement will increasingly contribute to reducing external imbalances and have now brought their currencies within ranges broadly consistent with underlying economic fundamentals, given the policy commitments summarized in this statement. Further substantial exchange rate shifts among their currencies could damage growth and adjustment prospects in their countries. In current circumstances, therefore, they agreed to cooperate closely to foster stability of exchange rates around current levels.” Source: Statement of the G6 Finance Ministers and Central Bank Governors (Louvre Accord), Paris, France, February 22, 1987.

For this section the authors are indebted to Prof. Ian Giddy, who provided a concise discussion of the various parity relationships in his article “An Integrated Theory of Exchange Rate Equilibrium”, The Journal of Financial and Quantitative Analysis Vol. 11, No. 5 (Dec., 1976), pp. 883–892. Online: http://​www.​jstor.​org/​stable/​2330587, Accessed February 2, 2011.

To understand the application of PPP, imagine trying to live in the United States on $3,000 per year. This is the situation faced by the “average” person in India based on GDP (PPP) divided by population. (The median Indian citizen lives on far less as income is not distributed evenly). PPP allows us a realistic comparison; when only nominal GDP per capita is used, the Indian GDP per capita of $1,000 USD is not a meaningful figure and as such is generally dismissed by casual observers since “that sounds very low but it costs much less to live there.” PPP takes this factor into account.