Negative effects of a Depeciation question (1 Viewer)

[hoschke118]

I dont understand why, in the short run, the price of exports fall when the dollar depreciates. It makes sense for it to fall from the perspective of overseas importers, but shouldn't Australian exporters still get the same amount of money as they did before.
It's the first dot point on page 139 of the tim riley book if that helps.
thanks

 

[Arowana21]

just imagine. In short run when there is a depreciation of the $A exports will be cheaper on world markets and so the first initial response would be that a short term decrease in export income. But in the longer term, since exports are cheaper this would attracte overseas people to buy australia's exports.

 

[hoschke118]

just imagine. In short run when there is a depreciation of the $A exports will be cheaper on world markets and so the first initial response would be that a short term decrease in export income.

In terms of foreign currency: yes
In terms of AUD: I don't see why export income changes at all
And we're referring to it in terms of AUD because we're talking about negative impacts within Australia.

 

[seano77]

After a depreciation the exported goods are now less expensive to buy, so when foreigners exchange currency to purchase the same amount of goods it wont be as expensive. This will make no difference to the amount of Australian dollars the exporters receive, however in the long run international competitiveness will attract greater volumes of exports. But you need to realise export competing firms sometimes need to import good from overseas for their imputs (now more expensive to do so). But really overall it is a positive impact because it increases international competitiveness.

 

[hoschke118]

But you need to realise export competing firms sometimes need to import good from overseas for their imputs (now more expensive to do so).

I considered this. It would solve the problem but wouldn't apply to all exportors so i can't see why he would include it in the book if this is the only reason, especially considering it's the first point.
Thanks for the help guys but i still think it's a bit iffy

 

[gnrlies]

I dont have a copy of tim riley on hand so cant refer to exactly what he says, but usually there are a few dimensions to consider such the following:

-Short run effects
-Long run effects
-Prices
-Revenues
-Price taker markets


It is important not to confuse them

Australian exporters charge in Australian dollars. If an exporter sells toy cars at 10 dollars a unit, it is going to continue to do so irrespective of the exchange rate. So as far as the exporter is concerned they receive the same amount per unit whether there is a depreciation or appreciation. But to the purchaser (the importer lets say from Afganistan - hell why not) the toy cars have become cheaper.

In introducing some of the aforementioned dimensions there are other things to consider. For example, if a contractual arrangement has been made, perhaps the exports have been denominated in another currency such as US dollars (as a lot of trade is). Also if the firm wishes to maximise profits it might choose to increase the price in terms of AUD. Then you might choose to look at revenues (short run and long run - i.e. the J-curve). Finally, you need to look at the market structure. What is the nature of the exports? are they exporting a homogeneous product with a world price (i.e. they are price takers and simply receive the world price which would mean they receive more AUD.

The point I want to make is that there is no simple answer to this question. More details are required and as always in economics there are many forces at play.

 

[hoschke118]

I dont have a copy of tim riley on hand so cant refer to exactly what he says, but usually there are a few dimensions to consider such the following:

-Short run effects
-Long run effects
-Prices
-Revenues
-Price taker markets


It is important not to confuse them

Australian exporters charge in Australian dollars. If an exporter sells toy cars at 10 dollars a unit, it is going to continue to do so irrespective of the exchange rate. So as far as the exporter is concerned they receive the same amount per unit whether there is a depreciation or appreciation. But to the purchaser (the importer lets say from Afganistan - hell why not) the toy cars have become cheaper.

In introducing some of the aforementioned dimensions there are other things to consider. For example, if a contractual arrangement has been made, perhaps the exports have been denominated in another currency such as US dollars (as a lot of trade is). Also if the firm wishes to maximise profits it might choose to increase the price in terms of AUD. Then you might choose to look at revenues (short run and long run - i.e. the J-curve). Finally, you need to look at the market structure. What is the nature of the exports? are they exporting a homogeneous product with a world price (i.e. they are price takers and simply receive the world price which would mean they receive more AUD.

The point I want to make is that there is no simple answer to this question. More details are required and as always in economics there are many forces at play.

ok thanks, that helped. So we are just meant to accept that export income will decrease (short run) due to other factors, such as the ones mentioned so far, not really explained in the book.?
stupid tim riley.
thanks guys

 

[gnrlies]

ok thanks, that helped. So we are just meant to accept that export income will decrease (short run) due to other factors, such as the ones mentioned so far, not really explained in the book.?
stupid tim riley.
thanks guys

Ah see now you talk about two different things

Export prices is not the same as export incomes. Export prices is simply the price, whereas incomes refers to the revenues. What Riley appears to be referring to is the J curve effect.

The J curve is a graphical representation of delayed passthrough. In other words, markets dont work instantaneously but are rather delayed. There are several factors that can cause such delays, specifically contractual arrangements can be pre-written which means they are not responsive to depreciations. Alternatively it can simply take time for foreign markets to take up the cheaper produce.

The J curve simply demonstrates that ordinarily we would expect a depreciation to increase the volume of exports (as they are now cheaper to purchase). But in reality due to the aforementioned delays, the volume of exports does not change initially. So in the short run export revenues would fall. But eventually contracts would reflect the improvement in prices and higher volumes would be purchased. This would increase export revenue in the long run (but even this is an assumption as it depends on the elasticity of demand).

Consider the following example

Trade is between Australia (AUD) and the USA (USD).

Original trade revenue is 100 USD

Then there is a depreciation of 50%. Australian exporters continue to charge the same price (AUD) which is effectively a fall in price (USD) for the importer. HOWEVER trade volumes do not change because contracts are already signed and sealed.

New trade revenue is 50 USD

Over time as new contracts are signed, higher volumes are purchased due to the cheaper price. Subsequently trade volume quadruples (the extent of this effect depends on the price elasticity of demand).

New trade revenue is 200 USD



Now think of those three numbers as it would appear on a graph over time.

Notice that it looks like the letter 'J'

Hence it is called the J-curve. Notice how the J indicates that exports are inelastic in the short run, and elastic in the long run? Whilst it will almost always be inelastic in the short run, it may not necessaily be elastic in the long run either. It could be that revenues fall from the original level, but there should be some recovery of revenues and graphically there would be a minima.

 

[ninjas]

well for export income y would it it fall for the Australian exporters in the short run? wouldnt it still be the same?

As u said the trade revenue is at 50US after the depreciation, as the US importers have to pay less. But after u exchange the 50US into AUD, it still becomes 100AUD due to 50% depreciation, thus the export income earned by the Australian is still $100?

Over the long term export income would increase due to increased international competitivness so more export volumes sold, but in the short term isnt the export income still the same (from the point of Australian exporting firms) ?

 

[gibbo153]

when ever i see an 09er asking for help on subject that i do, the temptation to sabotage them with a dodgy answer is so, so overwhelming haha.