Remember the last food for thought that I provided. The one where I had tried to seek if there would be an indirect positive effect on the national economy: GDP if the local currency is valued up => Food for thought I.
It was argued and even I was of the belief that the effects whatever would be very short term in nature. If there is a positive effect on the GDP, it would be short term & over the years everything would normalize and move toward natural or long term output value i.e. in the long run there won't be any effect on the production/consumption of the country.
Now take this: Recently I thought that the effect can actually be long term. In fact such an effort can actually help in more equitable form of redistributing money in the economy. The thought came to my mind when I went to a place to get some of documents photocopied. That person charged me 0.50 cents for each page of photocopy. Pretty reasonable isn't it. Wait convert that to rupees!! 7 RS per page of xerox. This is exactly what would happen if the rupee is valued up. Small petty jobs which are valued low cannot be priced lower than a certain limit. And hence the cost of these jobs would increase. Well this cost is actually increasing the wealth of the people who perform such jobs. Their spending power increases & wealth is actually redistributed from the wealthier to these people.
Again budding/prospecting economists What is your take on this???
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6 comments:
I havent read your earlier post.
but if the currency is valued up...meaning it becomes stronger then some goods become cheaper (imported) and some costlier...why would prices across the board increase?
@ Gregory you have not got the idea.. I mean the terminology is my own...Follow the link and read my previous post..you will get the idea..The link is given in this blog...Waiting for your comment after that
Well.. thats all in mind i would say.. i read ur earlier post as well. If you do what Zimbabwe has done, there will be no effect, as has been proved by zimbabwe experience. When you convert 100rs to 1Rs or 100 paise, the salaries and incomes would go down by that factor as well. and value of 1 paise would increase. the true value of money would be decided by relative inflation in the country - you can see whats happening in the countries with high inflation and low inflation - In UK 1Pence is still in circulation as the value for money has not gone down, but in India, its difficult to get anything below 50 paise now.
@ saurabh ... I understand what you are saying. Perhaps we cannot compare a country like Zimbabwe with India. It is right that the true value of the currency has not changed. But there is one fundamental difference between zimbabwe and India. While in India there is a large middle class which is growing & always willing to spend. The indirect effect of valuing the currency comes over here. Let's say today in India Xerox costs 50 paisa. And the currency is valued by a factor of 10. So the new xerox cost becomes 5p. Perhaps the 5p is such a small value the price gets sticky around 10p. The middle class would actually not mind that. They would be willing to spend that extra 5p.And thus there might be a small increase in GDP in this process
First, I disagree that if you do that, people would suddenly start paying higher prices for same thing, as they would always know that the real cost is 5p and not 10p.. and secondly, Even if what you say happens, increase in prices never increase the real GDP, they increase only nominal GDP. what you are saying is sth like increase the inflation and increase the nominal GDP while real GDP remains the same.
@ Saurabh pretty interesting actually. Well let us consider the equation of production.
Y = C + I + G + NX
Under my assumption the unit that is being affected is C (consumption). In the short term other factors are unaffected. Over the years however due to the increase in C, I (investment) would increase but that is a different story. Now what you say is due to the increase in P (prices), the increase in consumption is negated. This equation would not be enough to explain the phenomenon.
Thought provoking, but the immediate thing that comes to my mind is on a short term, the prices of the other goods would not increase. These are the goods whose prices are readjusted equal to the factor by which the rupee is valued up. Thus basket of goods which constitutes price index is not affected much. What it affects is more of a communism form, where wealth is redistributed from the rich to the poor.
Let me think over it, probably I will write a blog and try to explain the phenomenon using some classical demand supply graph.
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