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Path: utzoo!linus!philabs!pwa-b!mmintl!franka
From: franka@mmintl.UUCP (Frank Adams)
Newsgroups: net.politics,net.politics.theory
Subject: Re: The dollar and the trade deficit.
Message-ID: <751@mmintl.UUCP>
Date: Tue, 29-Oct-85 16:18:04 EST
Article-I.D.: mmintl.751
Posted: Tue Oct 29 16:18:04 1985
Date-Received: Fri, 1-Nov-85 01:39:05 EST
References: <368@drutx.UUCP>
Reply-To: franka@mmintl.UUCP (Frank Adams)
Organization: Multimate International, E. Hartford, CT
Lines: 34
Xref: linus net.politics:11077 net.politics.theory:1388
Summary: 


In article <368@drutx.UUCP> dlo@drutx.UUCP (OlsonDL) writes:
>There has been a lot of political posturing the last few years or so
>concerning the so called "over valued" American dollar.  Supposedly
>this is causing problems with trade.  I realize that the steel, auto,
>textile and other industries are hurting.  However, to say that the
>dollar has to be devalued to fix these problems is a specious argument.
>
>In the first place, making some foreign item more expensive doesn't
>necessarily mean that domestic items will take their place in the market.
>First of all, if people do not have the money for them now, the purchase
>will either be put off until later, or maybe not at all. Secondly, making
>foreign goods more expensive does not mean that prices of domestic items
>will be unaffected.  After all, the dollar that purchases a Toyota is no
>different than the dollar that purchases a Chevrolet.  If the dollar is
>devalued, it will make the Toyota proportionally more expensive, but it
>will also make the Chevy *and everything else* that the dollar purchases
>proportionally more expensive.  Therefore, a devalued dollar means that
>everybody who uses that dollar, loses.

No.  The reason people say the dollar is overvalued is precisely because
the ratio of the prices of goods in the U.S. and in other countries does
not match the exchange rates.  Devaluing the dollar means changing the
exchange rates, not changing its value against everything.

Now the Chevy is likely to get more expensive after a devaluation, but by
less than the Toyota.  There are two reasons for this.  One is that some of
the parts in the Chevy are imported, thus GM's costs will be higher.  The
other is that with importers being less competitive on price, GM can increase
its price and still sell its cars.  This latter effect is likely to small in
this case, since the importers now have very large profit margins, so will
likely accept lower profits instead of raising their prices.

Frank Adams                           ihpn4!philabs!pwa-b!mmintl!franka
Multimate International    52 Oakland Ave North    E. Hartford, CT 06108