Productivity And Exchange Rate Studies By Experts

This article discusses the wide concept of productivity and exchange rate. In different contexts the exchange rate and productivity has different definitions. For an instance the productivity can be described as the output of a man per hour in a very precise way.

The rise of productivity leads to increased supply of goods and services. The concepts of supply/ demand and productivity are inter-related to each other. The concept of growth of productivity and exchange rates got its importance in 2001 when economists tried to sought and explain the US dollar’s adamant rise against the Euro. Read on to know further on exchange rate and productivity.

The Federal Reserve Bank of New York and the Bank of England reported on issues like whether or not the strength of US dollar was explained by the increased productivity growth. Like with the help of PPP short term predictions for exchange rates are not well predicted due to this productivity growth can not be used as a short term trading model. But, productivity growth and PPP are used to determine trends in medium as well as long term exchange rates.

Due to the presumption that there is always demand with the increased supply and due to the dealing of productivity growth with the increased supply; it becomes unsustainable at some point. Sometimes the level of supply exceeds the demand and according to the natural dynamics the equilibrium must be restored by eliminating excess of supply according to the demand.

If productivity is taken as supply and wages are taken as demand, according to the standard economic model that higher productivity growths will automatically yield higher wages in result. Mostly demand and supply does not keep up the pace with each other due to which it again become essential to match the level of demand with the supply.

Insufficient demand growth in the form of wages can be artificially propped up to meet ever increasing supply growth in the form of productivity through debt or borrowing. Eventually, of course, the gap between supply and demand becomes too wide even for debt to bridge. When that happens, supply crashes. At the microeconomic level, faced with a massive inventory overhang, companies cut costs and the easiest way of doing that is to cut jobs. Demand falls as well.

However, in reality the simple model of productivity growth and demand growth does not consider debt. Insufficient growth of demand in the form of wages can be artificially sustained in order to meet the rising supply growth in the form of productivity through debt or borrowing. Eventually, of course, the gap between supply and demand becomes too wide even for debt to bridge and then takes place the crash of supply.

The discussion above clearly shows that there is an important relationship between the productivity and exchange rate. Although, the degree of correlation has declined sharply in different periods of time, the relative productivity growth levels are an important indicator of exchange rate direction. But they are not looked upon as capable of providing a more sophisticated analysis by traders, either in terms of the timing or degree of the chosen direction.