Wed 10 Jun 2009
Effect of Currency Devaluation on GDP?
Posted by echan76 under Economics
[2] Comments
nothereanymoreomgteh asked:
Please refrain from posting if you DO NOT know the full answer.
Since a country’s GDP is the total market value of its output (consumption/0investment/government spending/net balance of trade) measured in US dollars. Lets use the Canadian dollar as the example; the Canadian dollar has gained 40% on the US dollar over 4 years, a whole 10% in the past three weeks (from 1 USD-1 CAD to 1.1 USD-1 CAD today). If the Canadian GDP were to be converted to dollar, wouldn’t this “raise” their GDP by 10% artificially. Obviously, GDP does not work this way, how is currency exchange rate adjusted? How is it dealt with?
@Kevin; Is is understandable that GPD of a country is reported in their native currency. But for comparison purposes, when one say ‘Country’ has the 3rd world largest economy, GDP nominal is referred to. Will I be be seeing a magical 20% increase of Canada’s nominal GDP next year and a 7% increase of Chinese GDP (I know the currency is pegged, but rates were forced down this year) on top of their natural growth?
Please refrain from posting if you DO NOT know the full answer.
Since a country’s GDP is the total market value of its output (consumption/0investment/government spending/net balance of trade) measured in US dollars. Lets use the Canadian dollar as the example; the Canadian dollar has gained 40% on the US dollar over 4 years, a whole 10% in the past three weeks (from 1 USD-1 CAD to 1.1 USD-1 CAD today). If the Canadian GDP were to be converted to dollar, wouldn’t this “raise” their GDP by 10% artificially. Obviously, GDP does not work this way, how is currency exchange rate adjusted? How is it dealt with?
@Kevin; Is is understandable that GPD of a country is reported in their native currency. But for comparison purposes, when one say ‘Country’ has the 3rd world largest economy, GDP nominal is referred to. Will I be be seeing a magical 20% increase of Canada’s nominal GDP next year and a 7% increase of Chinese GDP (I know the currency is pegged, but rates were forced down this year) on top of their natural growth?
@Meg; I already know and understand that PPP is adjusted just exchange rate and standard of living.
Looking at the link I included might help you get the idea. You are right, we can’t inaccurately count a “higher” GDP as growth if it’s just a result of the floating exchange rate against the US Dollar.
BUT, it’s not correct to say that GDP is “measured in dollars”. GDP is measured by each country in its own native currency. It’s just various organizations or economists or news media like “The Economist” who then translate things into US dollars for the sake of consistency in reporting. Statistics Canada issues its regular reports on Canada GDP using Canadian dollars, not US dollars.
But as you have anticipated, there are pitfalls you have to be careful to avoid when dealing with various currencies. So, econ data like in the link below for Canada would show a snapshot of GDP or GDP per head, etc, based on the exchange rate when the report or table is set up. (And hopefully will tell you that exchange rate in a footnote).
But something like a rate over time, such as an annual GDP growth number, will be taken from the original country’s reporting in its native currency. So, exchange rates have no impact (and inflation is properly accounted for in a “real GDP” number). And if someone were making a graph or table of Canada’s economy over the years in U.S. dollars, they’d just have to be careful to pick one exchange rate and stick with it, even if (say) that exchange rate didn’t actually apply back in 2002.
When looking at the buying power of a country in world markets the exchange rate is used, and Canadian dollar can buy 10% more of US produced goods
When comparing countries standard of living GDP is converted into PPP or purchasing power parity, which is and index like the CPI, that looks at price of a market basket of goods in the country using their currency. Using this method the purchasing power of the Canadian dollar will increase somewhat because imported good will be cheaper, but not the full amount of the exchange rate shift. This number is quoted in US dollars and is the equivalent purchasing power of $ in the US.