The notion of
flexibility of prices has been a point of divide between the Classical
economists and the Keynesian economists, Sir (Paul Krugman) teaches Keynes so
his inclination is acceptable and welcome. But, prices in the economy of which
some are rigid and sticky and some not, however, wages are rigid, but interest
rate are not... Near zero interest rate in much of the developed is a simple
example of flexible price of capital... Moreover, the law of supply that price
may fall as a result of increase in supply and vice versa, also operates in the
economy; the supply glut of oil has lowered prices... In the developed world
the price-level has gone down as a result of more money supply, lower interest
rate and higher supply... However, there is nominal downward wage rigidity as
put by Paul because labour won’t accept lower nominal income, but lower real
wages or minimum real wages cut with higher inflation might reduce the actual
or real price of labour which has increased supply, but lowered demand which
have resulted in low demand and growth... Lower real wages have also reduced
demand for imports... Lower real wages in order to gain competitiveness and
exports has actually resulted in low domestic demand and imports culminating in
low domestic demand, low global demand, low domestic growth rate and low global
growth... Prices might be flexible, but nominal wages might be not...
Lower domestic
price-level and wage demand have made Germany more competitive i.e., internal
devaluation... Lower prices in the domestic economy and inflation and
depreciation in the trading partners’ economy have lowered the prices of German
exports more relative to the competitors... The only way to reduce trade
imbalance is to also use internal devaluation by the trading partners to
increase competitiveness of exports and reduce trade-deficits... Germany has
increased real exchange rate (nominal exchange rate minus inflation) in order
to achieve devaluation and exports and the other countries may also increase
real exchange rate by lowering the price-level and contain wages and increase
competitiveness... To reduce German surplus it is important to play the German
way...
Competitiveness means the scope to reduce
costs, reduce prices and increase demand and secure economies of scale as in
the Perfect-Competition in which price equals the marginal cost, lower prices
also help achieve market share which increases domestic-demand first and also
external, and help lower unemployment, and increase the economic-growth rate...
Germany and Netherlands
have much in common, low inflation and competitive wages... France and Britain
have high-inflation and increasing wages in common... At one end, we have
Germany and Netherlands as examples of internal devaluation, countries which
have gained competitiveness by cutting costs and increasing the real exchange
rate and at the most extreme the UK or Britain and France which have tried to
gain competitiveness by external devaluation or depreciation or by increasing
inflation and the nominal exchange rate... The countries that have used
internal devaluation seem more successful and have trade surplus... Whenever
they try to devalue, internal by some countries and external by others, the gap
between competitiveness increase double because at one hand we have lower
prices and higher real exchange rate and at other we have inflation and higher
nominal exchange rate... In internal devaluation prices are cut to decrease
cost and prices and increase competitiveness and in external devaluation
inflation cuts the real costs - real interest rate and real wages...
Remarkable
price-stability in Germany has made achieve competitive wages, too... Lower
borrowing cost has increased production/supply... Lower borrowing cost has also
increased competitiveness...
It is probably a matter
of real-wages in the trading partners’ economy... In order to achieve
devaluation or depreciation we forget that we are lowering domestic real-wages
by increasing inflation and also wages in the trading partner's economy by
curbing imports only to reduce deficit or increase surplus though a lower
unemployment is more important than deficits or surpluses and depreciation only
reduces domestic-demand and also demand for exports only reducing the
exchange-rate which is a matter of trade-off between domestic-demand and
foreign demand... After full-employment more demand for exports might result in
increasing wages and the economy might lose competitiveness... which might
increase deficit... The central banks try to control demand after full-employment
so how too much foreign demand might be good... And for this a higher exchange
rate may be used to control demand for exchange and exports for price-stability
in the economy... If demand for foreign exchange is decided by demand for goods
and services by a country the problem of unstable exchange rate and
depreciation might not be there because then the actual demand and supply would
determine the exchange rate and there would be less currency manipulation to
gain competitive depreciation and exports at the cost of domestic demand and
imports...
Trade becomes important
in the short-run after full-employment if inflation (is there and) to be
controlled. Economists favor lower prices and higher real wages and incomes to
increase demand and growth…
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