Effects of inflation on imports/exports

Inflation impacts FX rates (relative PPP) so it has an indirect impact on imports and exports.

So you mean, for example, if inflation lowers the FX rates and lowers the relative purchasing power of a specific currency, that country's exports would benefit while its imports would suffer?

Yes, provided no other variables such as government interventions.

I agree with aleandro but I would be very suspicious about the large number of other omitted variables. Why is there an inflation in the first place? A normal and constant rate of inflation should have no effect on import/export ratio if we take expectations into account.

How strong of an effect does inflation/deflation play on the relative strength of a curency?

Isn't relative PPP mostly determined by investor confidence and demand & supply?

If so, then which variables have the strongest effect on the import/export ratio?

I actually disagree with aleandro, you cannot solve your net export defficiency with inflation.

If you are experiencing inflation, then yes your currency goes down in value making it more attractive to export. But at the same time it costs you more to produce the product due to inflation, so you are not getting the benefit of lower currency value because you will offset it with a higher price tag.

stk123, doesn't that depend on the nature of the industry?

I mean, not all goods become eqaully more costly to produce in times of inflation.

It puts Art Vandelay of Vandelay Industries out of a job....

Oh boy...

You guys are missing a lot of variables. Some of the bigger ones:

• currency will also get stronger because of the expectation that central bank will raise rates.

• it's HUGELY relevant if we're talking about the US or not.

• lots of ideas about the shape of the curve and market responses relating to the effect on imports/exports/current account balance/total volume. None of the intelligible ones are represented above.

ideating - obviously we are missing a lot of variables, and that is why I did not respond to this thread when I first read it. I just wanted to state an opinion on why aleandro was wrong with his reasoning.

BTW, your first argument that the currency will get stronger, because of the expectation that the central bank will raise rates is misleading. High inflation leads to a weaker currency, and raising rates at best will lead to a less (but still) weak currency, and NOT make it stronger.

Very hard question to answer - but the answer definitely doesn't lie in a flawed international trade theory (PPP).

Ideating - I totally agree with the importance of expectations of central bank interest rate hikes to combat inflation.

stk123 - Your arguments resemble an object after being hit with a shotgun shell - there are holes everywhere in your logic. If you could explain to me how inflation, in and of itself, leads to a weaker currency, I would be very much surprised. In fact if you look at graphs of exchange rates vs inflation, I wouldn't be surprised if currency depreciation led inflation (opposite of your order of events).

Two main determinants of the strength of a currency (or exchange rate) = CA flows (exports, imports) and Financial Account flows

Clearly magnitudes of the two accounts matters a great deal - but I think it is hard to generalize.

Just wanted to clear up some stuff. My answers were based on a quiet simple scenario to illustrate likely effects. That is why I mentioned "provided no other variables". Off course if we want to open up this scenario, we can pretty much make import and export do whatever we would like them to do.

A good case study would be US/Zimbabwe (provided that they had a free exchange rate regime).

Like I said this discussion can be taken to highers levels. But I was under the impression that the original poster just wanted a simple answer. This answer is that yes inflation can indirectly affect import and export.

Hey yahoo you are an econ major so I am not going to explain how inflation leads to a weaker currency or vice versa, you should know this stuff. And there is nothing wrong with my logic; I was simply disagreeing with aleandro's simple answer by using a simple example. As aleandro said I do not want to get into a discussion on how the economy works, because I don't have time for this.

But I will give you an example:

Many people and economists think that we will be experiencing high inflation and a weaker currency in the future, mainly because the government is printing a lot of money. Now you can't tell me that people are expecting inflation, because they expect a weaker currency - it is running the printing press that will cause both.

In the end high inflation leads to a weaker currency and vice versa, or should I say high inflation and a weaker currency go together.

-High inflation will make investing in your country less attractive, which leads to less demand for your currency therefore weakening the currency. -High inflation makes your products less affordable to export, which leads a more negative export/import balance which as you state leads to a weaker currency.

These two examples work the other way around also. High inflation and weak currency go hand in hand, and which comes first is a chicken and egg discussion (I hate this analogy because the egg did come first).

Dammit, I got into an economic discussion anyway. All I can say yahoo is that you need to go back to reading your books and try to understand them better before you start criticizing me, or better yet get some real world work experience and you will find out it is not clear cut that a weak currency causes inflation, but not the other way around. Everything in the economy is intertwined and you can't just say one causes the other but not the other way around.

In the end I was just trying to rebuff aleandro's argument, and I still stand by what I said. High inflation causes your products to be less attractive to export, but it goes in hand with a weaker currency that offsets the higher product costs. Therefore it is not that obvious how inflation impacts net exports; it depends on several other factors as well.

stk123, so you mean that the effect of inflation on net exports (amongst MANY other variables) depends on whether inflation has a stronger impact on product costs (which would decrease exports) or on a weaker currency (which would increase exports)?

As mentioned above, I understand that many other variables play a role as well..

sof_2, that is exactly what I am trying to say, but I have no idea on how strongly currency and inflation are correlated to each other, although they are linked together.

The dollar has weakened severely in the 2000-2008 period, but that did not cause any inflation (contradicting what yahoo said that weaker currency may cause inflation and not the other way around). But if you experienced severe inflation than I guarantee you that the currency will weaken, otherwise you would be importing things for "peanuts". Imagine several periods of 100%+ inflation without the currency weakening; you would be buying BMW's for (today's equivalent) a couple hundred dollars. Because your pay would double each year, while $1 would still get you almost 1 euro. So you see that higher inflation has to lead to a weaker currency, look at Argentina as an example.

sof_2:

Given that a country uses a floating exchange rate, what is the relationship between inflation/deflation and imports/exports?

I understand that a weaker currency encourages more exports, but I am not sure that there is a direct relationship between inflation/deflation and imports/exports?

Thanks a lot for the help

Inflation increases the cost of imports for a country. During inflation, the country has to pay more for purchasing commodities from other nations.

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