Marshall Lerner Condition

The Marshall-Lerner condition When evaluating the impact of a currency fluctuation on the balance of trade we should consider the Marshall-Lerner condition. We normally assume that when a currency depreciates imports fall and exports increase and therefore balance of trade improves.   When a currency appreciates we normally assume exports fall and imports increase and thus… Continue reading Marshall Lerner Condition

Is a strong currency desirable – Part 2

Yesterday we discussed whether a strong currency was desirable in terms of the macro-economic objectives of an economy. I concluded that while it helps keep inflation under control it is fairly damaging to the other macro-economic objectives. But this is a fairly simple analysis and conclusion, how can we take it further? Perhaps we need… Continue reading Is a strong currency desirable – Part 2

Is a ‘strong’ currency desirable?

Is a ‘strong’ currency desirable? Whether a strong currency is good for your country or not is a very common question I encounter when students first start learning about exchange rates and trade. Anyone new to economics often assumes that a strong currency is desirable. This is understandable but fairly simplistic. Firstly, the word ‘strong’… Continue reading Is a ‘strong’ currency desirable?

Why do we need to exchange currency?

Exchange Rates Definition: An exchange rate is the rate at which one currency is traded for another. For example if 1 Pound Sterling buys 1.5 US Dollars, then the exchange rate is £1 to $1.5.  Why exchange currencies? Currency is exchanged, or traded, continuously around the world. Currency is traded for a variety of reasons:… Continue reading Why do we need to exchange currency?

Exchange Rate Determination

Determination of an Exchange Rate: In a free market the exchange rate between currencies is determined by demand and supply. Let’s assume there are just two currencies, the $ and £, and one factor determining exchange rates, trade in goods and services. Now let’s say I want to start selling Classic American Cars to British… Continue reading Exchange Rate Determination

Question on Contestability: ‘How can you tell if it is contestable or competitive?’

A student asked me a good question a couple of days ago, the question was, roughly:  ‘How can you tell if a firm is keeping prices low because it is a contestable market or because it is actually already facing competition.’ I asked her to explain and she pointed to an example where she lives. On her… Continue reading Question on Contestability: ‘How can you tell if it is contestable or competitive?’

Functions of Money

Money   Money must fulfil four functions if it is to be considered money 1 – Act as a medium of exchange. This means it can be used to buy and sell goods and services. This is obviously vital, if I am selling a good or service I will only accept the ‘money’ someone offers… Continue reading Functions of Money