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February 20, 2007

Does change in exchange rates affect international trade?

If yesterday one dollar bought 100 yen, and today one dollar buys 120 yen, each dollar today buys 20 percent more Japanese goods than it bought yesterday.

Source: Cafe Hayek: Hooray for a Strong Dollar

Really! So, presumably, this 20% more japanese products came out of nowhere in a day?

Or did he meant to say that purchasing power has shifted from holders of Japanese Yen to holders of US dollars. But how can we conclude that merely from the fact that exchange ratio between dollars and Yen has changed.

If say, Japanese govt. has printed more Yen. It will simply inflate the prices of all products in Yen. US dollars will also appreciate compared to Yen but (may) not appreciate compared to Japanese products.

So, why would US dollars be able to buy more Japanese products?

If amount of US dollars and Japanese products in the market haven't changed in a day, why would their ratio (prices) change?

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