o what is NCM’s idea? Here it is:
a. Country’s like the USA cannot improve the BT and CA by currency manipulation because a cheap $ will stimulate exports and reduce imports initially, but it does not end there.
b. In the USA the marginal propensity to spend by households and firms is probably < 1. However, since about 1981 or so, in almost every year that Y goes up we end up spending more than the increase in Y, <link is hidden> Ab up exceeds the increase in Y. This occurs primarily because government purchases go up when tax revenue increases as Y up.
c. In other words, in the US, Y – Ab gets smaller if there is an increase in Export or decrease in Import via $ depreciation.
d. Macroeconomics tells us that this means that eventually BT and CA get <link is hidden> again, its because we overspend.
3. Now for China. I have always heard and read that people in China save a huge percentage of their income, <link is hidden> more than 30%. I know nothing about govt budget surpluses or deficits by the Chinese <link is hidden> maybe there is no data on <link is hidden> if they have a govt budget surplus, or a balanced budget, or budget deficit that does not more than cancel out their huge % of saving, then currency manipulation can work magically.
a. An undervalued yuan will increase exports and decrease imports, and stimulate output and income. If Y goes up more than Ab then the long-run effect will be a permanent increase in BT or CA.
