Economist Article Link: http://www.economist.com/news/finance-and-economics/21571165-currency-wars-burgers-verdict-bunfight
Recently in IB HL Economics, we have been studying exchange rates and protectionism; in particular we have explored the determinants of changes in exchange rates and discussed the advantages and disadvantages of under/overvalued exchange rates and different exchange rate regimes. The advantage to a undervalued currency is obvious; the exports of an economy with an undervalued currency are significantly aided by their relatively lower prices abroad, which simulates economic growth. However, this comes at a cost to the people importing the goods, who are spending their money overseas instead of supporting their local producers and growing their own economy. The article discusses fears amongst many economists that there are emerging "currency wars," battles between nations to devalue their own currencies to give their economies a boost, a phenomenon that could result in a vicious spiraling price war reminiscent to those seen in the 1930's. The Big Mac Index presents a casual, humorous look at these claims, and looks at how certain economies, such as those of Brazil, India, the EU, and Switzerland, have seen movements in the relative valuation of their currencies, and what might have caused those movements.
The impact this has on my life is obvious; while Thailand is not covered in this article, it is currently significantly undervalued, which means I can enjoy junk food at much lower prices! I'm still not sure if that's a good thing. However, the "currency wars" could be a threat to the economy of Thailand; if other countries start rapidly devaluating their currencies, there could be severe damages to Thai exports. This article provides a fascinating look into the politics of exchange rate manipulation through a simple analogy, and it shows us how the real-world movements in exchange rates closely reflect the theory we study in our textbooks.
Recently in IB HL Economics, we have been studying exchange rates and protectionism; in particular we have explored the determinants of changes in exchange rates and discussed the advantages and disadvantages of under/overvalued exchange rates and different exchange rate regimes. The advantage to a undervalued currency is obvious; the exports of an economy with an undervalued currency are significantly aided by their relatively lower prices abroad, which simulates economic growth. However, this comes at a cost to the people importing the goods, who are spending their money overseas instead of supporting their local producers and growing their own economy. The article discusses fears amongst many economists that there are emerging "currency wars," battles between nations to devalue their own currencies to give their economies a boost, a phenomenon that could result in a vicious spiraling price war reminiscent to those seen in the 1930's. The Big Mac Index presents a casual, humorous look at these claims, and looks at how certain economies, such as those of Brazil, India, the EU, and Switzerland, have seen movements in the relative valuation of their currencies, and what might have caused those movements.
The impact this has on my life is obvious; while Thailand is not covered in this article, it is currently significantly undervalued, which means I can enjoy junk food at much lower prices! I'm still not sure if that's a good thing. However, the "currency wars" could be a threat to the economy of Thailand; if other countries start rapidly devaluating their currencies, there could be severe damages to Thai exports. This article provides a fascinating look into the politics of exchange rate manipulation through a simple analogy, and it shows us how the real-world movements in exchange rates closely reflect the theory we study in our textbooks.
