Your videos are really good! Helps me a lot. There's just one thing one thing i'm still not clear about. Can you please elaborate more on how speculation affects the Floating ER? As in for example, if the US speculates that the Pound will drop in the future, would the demand for Pound decrease, which also as a result leads to a greater depreciation in the pound?
Could you also argue that the Marshall-Lerner Condition backs up this idea only if combined elasticities of demand for exports and imports exceed 1, but if it is inelastic - the theory is invalid ?
The real issue is short selling (selling something you don't own now, as if you do own it, and buying it later.) This creates a short term change on the supply for currency, and will push the price down artificially. There is a lot of psychology in speculators hunting for bargains, and so there can be a "run" on a currency. This distorts the price, and will reduce the amount of value of the trade that are affected by that exchange rate. As these speculators have to purchase the currency again, there is no real change in supply, so this results in a situation where we are not trading at the natural intersection of P and S, we then have drag (losses).
Great video but does the theroy work in the opposite direction as well? Like will the exchange rate reduce a trade surplus? Would that be a disadvantage?
It does reduce surpluses, but you have to remember that current account surpluses means that money is entering your economy. By making imports cheaper, you effectively reverse this inflationary effect. Price isn't everything; trading higher than you should means you sell less items and your net profit is lower. By trading at the sweet spot, the total value of the trade is maximized in both directions, so both economies gain from floating exchanges.
You know what right, this is 7 years later but thanks mate. you saved my bacon
The absolute goat
Your videos are really good! Helps me a lot. There's just one thing one thing i'm still not clear about. Can you please elaborate more on how speculation affects the Floating ER? As in for example, if the US speculates that the Pound will drop in the future, would the demand for Pound decrease, which also as a result leads to a greater depreciation in the pound?
+Chamod Fernando Yes absolutely, the way you have explained this is correct.
Could you also argue that the Marshall-Lerner Condition backs up this idea only if combined elasticities of demand for exports and imports exceed 1, but if it is inelastic - the theory is invalid ?
aman singh Yes absolutely
What do you mean by speculation?, like future predicaments of the exchange rate as in a floating exchange rate is seizing to change?
yes
The real issue is short selling (selling something you don't own now, as if you do own it, and buying it later.) This creates a short term change on the supply for currency, and will push the price down artificially. There is a lot of psychology in speculators hunting for bargains, and so there can be a "run" on a currency. This distorts the price, and will reduce the amount of value of the trade that are affected by that exchange rate. As these speculators have to purchase the currency again, there is no real change in supply, so this results in a situation where we are not trading at the natural intersection of P and S, we then have drag (losses).
Would you not also say that if the UK is in a trade deficit the demand for the pound falls? Or is it just that supply of pound increases?
explains it so well
great video appreciate it
Could you do a video on speculation please
Great video thank you
Thank you
Great video but does the theroy work in the opposite direction as well? Like will the exchange rate reduce a trade surplus? Would that be a disadvantage?
It does reduce surpluses, but you have to remember that current account surpluses means that money is entering your economy. By making imports cheaper, you effectively reverse this inflationary effect. Price isn't everything; trading higher than you should means you sell less items and your net profit is lower. By trading at the sweet spot, the total value of the trade is maximized in both directions, so both economies gain from floating exchanges.
I loved your videos but it would be much better if you could provide scripts of your full lecture.
Thanknyou
Please hindi video show