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Exchange rates n all January 7, 2007

Posted by Sharath Rao in economics, reminisces-1990s.

Here is something I understand on the surface of it because it is written in plain terms. But I want to understand this better.

[ Emphasis mine ]

When Americans buy foreign-made goods and services, foreigners earn dollars. The only way America would run no trade deficit is if foreigners spent all of these dollars buying goods and services from Americans. Instead, though, foreigners invest some of their dollars in America. They buy American corporate stock, they build their own factories and retail outlets in the US, they lend dollars to Uncle Sam, and they hold some dollars in reserve as cash.

Aren’t you proud that so many people the world over eagerly invest their hard-earned wealth in America?

As an American, I’m proud and optimistic. Foreigners invest in the US so readily because its economy is so strong. And even better, these investments strengthen the economy by creating more capital for American workers. These investments raise workers’ productivity and wages.

Remember: A trade deficit is not synonymous with debt.

I’m writing this letter on a new Sony computer that I bought with cash. I owe Sony nothing. If Sony holds the dollars it earned from this sale, or if it uses these dollars to buy stock in General Electric or land in Arizona – that is, as long as Sony invests its dollars in America in ways other than lending it to Americans – the US trade deficit rises without raising Americans’ indebtedness.

Americans go more deeply into debt to foreigners only when Americans borrow money from foreigners. Uncle Sam, of course, borrows a lot of money, from both Americans and from non-Americans. I share your concern about the reckless spending and borrowing practiced by politicians in Washington.

The other thing I want to learn about is how exactly exchange rates work. I have a rough idea but thats not sufficient :). Not necessarily because of a personal stake in it, but just curiosity. My earliest memory of an exchange rate is in mid-1996 in Class X when Gilbert Sir asked how many Rs. is equivalent to a dollar, I remember saying Rs. 35.18.

I do remember a time when it was Rs. 32 though I dont know when exactly it was. Yep, here I found some historical trends. The earliest they have is from 1990, Jan 4st. It was Rs. 16.94. I remember my dad saying it was about Rs. 4 when he was in high school.

What is your earliest memory of the use of money by yourself ? Hmm…I cant remember anything significant really.

International trade/finance/economics is indeed interesting.



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