Monday, October 08, 2007
ninety eight pound weakiling
The dollar keeps getting weaker relative to the Euro. That means that a dollar buys less European goods than it before. Of course, Germans and other users of the Euro can now buy more US goods which should be good for American exporters. Econ 101 uses the formula Y = C + Ig + G + Xn to explain that the GDP (Y) is a function of spending. Xn = Exports - Imports. If imports are increasing, the equation shows that you are adding a negative so Y goes down. But Y is what is produced at home. In order for United States citizens to import more, C or consumption must have increased. How could C increase and Y or income go down? US citizens had to borrow or sell American assets. Americans could have saved less too. As American buys more goods abroad, the dollar will become weaker. Let's hope that American goods gain popularity.