What the Depreciation of the Dollar Means
for the Palouse
Andrew J Cassey
School of Economic SciencesWashington State University
October 5, 2011
Andrew J Cassey Depreciation & the Palouse
Why Listen to This Guy?
I Ph.D. 2008 University of Minnesota
I Dissertation: State Export Behavior & Policy
I Research interest: Regional development throughexportation• Information barriers to trade• Costs to begin exporting• Export promotion policy
I Contact information• [email protected]• 509-335-8334• extecon.wsu.edu/pages/Regional_Economics
Andrew J Cassey Depreciation & the Palouse
Introduction to Currency Exchange
I Purchases of foreign goods and assets involves two trades• Buy foreign good or asset with foreign currency:
Foreign goods market• Buy foreign currency with domestic currency:
Exchange rate market
I Effective price can change in two places instead of one
I Theory of exchange rates & international trade
I Data on recent exchange rate trends
I What does this mean for U.S., WA, and the Palouse?
Andrew J Cassey Depreciation & the Palouse
Market for Goods
Andrew J Cassey Depreciation & the Palouse
Market for Foreign Currency
Andrew J Cassey Depreciation & the Palouse
Foreign Currency Price Changes
Andrew J Cassey Depreciation & the Palouse
Appreciation vs. Depreciation
I Appreciation is when each unit of domestic currencybuys more foreign currency than before• This means price of foreign currency decreases• Strong currency
I Depreciation is when each unit of domestic currencybuys less foreign currency than before• This means price of foreign currency increases• Weak currency
I Widespread belief that currency “strength” associatedwith nationalism
I In reality, exchange rate changes help some Americans &hurt others
Andrew J Cassey Depreciation & the Palouse
An Example
I A cheeseburger costs 100 pesos in Mexico.Exchange rate is 10 pesos.It costs $10 for an imported cheeseburger(No transportation costs, taxes, or fees)
I Now cheeseburger still costs 100 pesosBut exchange rate = 20 pesos.
I What is U.S. price to import a cheeseburger now? $5Has the peso appreciated? No, depreciatedHas the dollar appreciated? Yes
I Conversely, if a hotdog cost $8 in the U.S., Mexicansused to pay 80 pesos, but now they pay 160 pesos!
Andrew J Cassey Depreciation & the Palouse
Exchange Rates and International Trade
I When domestic currency appreciates then• Imports become cheaper for domestic buyers• Exports become more expensive to foreign buyers
• Who benefits? U.S. cheeseburger eaters(whether they import or not), Mexican exporters
• Who loses? U.S. cheeseburger makers, Mexicanimporters
I When domestic currency depreciates then• Imports become more expensive for domestic buyers• Exports become cheaper to foreign buyers
I Absolute exchange rate does not matterOnly the change in exchange rate matters
Andrew J Cassey Depreciation & the Palouse
Exchange Rate Trends: Biggest Partners
Andrew J Cassey Depreciation & the Palouse
3 Variables Correlated with Exchange Rate
1 Relative inflation: High inflation ⇔ DepreciationU.S. has low inflation, but high relative to Can. or Euro.
2 Relativel interest rates: Low interest ⇔ DepreciationRelated to relative public debtsU.S. has low interest relative to Eurozone
3 Trade: Deficit ⇔ DepreciationU.S. trade deficits not historic, but big
I Randomness: By definition, not correlated, butimportant, especially if volatile
Andrew J Cassey Depreciation & the Palouse
Exchange Rate Trends: North America
Andrew J Cassey Depreciation & the Palouse
Exchange Rate Trends: Europe
Andrew J Cassey Depreciation & the Palouse
Exchange Rate Trends: East Asia
Andrew J Cassey Depreciation & the Palouse
Is the U.S. in decline?
I Is the U.S. weakening? Or weakening relative to others?
I Maybe, but I don’t think exchange rate informationindicates this
I It does indicate that now is a relatively good time to be aU.S. exporter
Andrew J Cassey Depreciation & the Palouse
What does this mean for Washington? Palouse?
I Washington exports more of its shipments than any otherstate
I 60+% of WA exports in aerospace industryPerhaps not a big impact here because contracts are notperfectly competitive
I Other big exporters: petroleum & coal products;navigational instruments; computer equipment
I I suspect gains will be “big” for small exporters, but notshow up in state-level data
I What about wheat?
Andrew J Cassey Depreciation & the Palouse
Exchange Rate Trends: Wheat producers
Andrew J Cassey Depreciation & the Palouse
Implications for Exporters
I After 10 years of a strong currency (favoring importers,consumers), dollar is in a weakening trend benefiting U.S.firms
I Will it last? - Nobody knows (but people paid to predict)
I 2008 appreciation due to worldwide recessionInvestors sold domestic assets to buy U.S. debt (bonds)requiring dollars
Andrew J Cassey Depreciation & the Palouse
But what about the Euro?
I Question: What will happen with the European debtcrises?
I Answer: I don’t know.
I My understanding of plans is that Europeans are hopingexports can save them
I If decreased government spending does NOT increaseconsumption and investment, then where else can growthcome from?
I Will ECB manipulate currency (as China does) to spurexports?That is outside of its mandate for inflation target
Andrew J Cassey Depreciation & the Palouse
Export Assistance Program
I No cost, confidential, in-depth and long-term exportadvice
I Assessment of export readiness
I Co-development of export plan
I Guidance through export forms and barriers
I Small Business Development Center
I Washington State Department of Agriculture
I Community & Economic Revitalization Board
Andrew J Cassey Depreciation & the Palouse