Exchange Rate in the Economy

2 minute video presented by Milton Friedman, explaining that the exchange rate can be a confusing thing to understand if not explained properly.
He describes that the usual argument against complete free trade is that cheap labour from abroad will take jobs away from workers at home.
He asks a question “What is cheap?” Japanese worker is paid in Yen; and American worker in dollars.
How do we compare the dollar with yen? We need some way of transforming the one into the other. That is where the exchange rate enters in – the price of yen in terms of the dollar.
What happens when the price of yen in terms of dollars goes up? Japanese labour is no longer so cheap. Japanese goods are no longer so attractive to American consumers.
On the other hand, American labour is no longer so dear to the Japanese. American goods are more attractive to the Japanese. Americans will export more to the Japanese and will import less from them. New jobs will be created in the export industries to replace any jobs that might have been lost in industries competing with imports.
Friedman concludes that “that is how a free market and foreign exchange balances trade around the world when it is permitted to operate.”

The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.

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