Juliet reassured Romeo “that which we call a rose, by any other name would smell as sweet.” But is that also true for economic indicators? If we used different terms, would people view some economic issues differently?
Consider one troublesome term: “most favored nation.” Nations joining the General Agreement on Tariffs and Trade could still set their own tariffs, but they could no longer charge different rates on imports from different countries. Goods from any other GATT member nation had to be taxed no higher than those from “the most favored” other nation.
The term meant simply that the joining nation had to treat other signatory nations equally, with no special treatment for one. Unfortunately, whenever the U.S. government extended identical treatment to some non-GATT nation, such as China for many years, Congress had to approve “most-favored-nation” status for that country.
The term caused endless misunderstanding. Econ profs always faced angry questions of “why should we treat those Communists better than anyone else?” Finally, the government changed the official term to “normal trade relations.” It is a better description and causes much less controversy.
Using the terms “stronger” and “weaker” to describe changes in exchange rates causes even greater misunderstanding. Strength is good and weakness is bad, right? So when the dollar is getting stronger, people interpret it as good news, and when it is getting weaker people sense national failure.
But an exchange rate is just a price, little different than the price of houses, onions, or gasoline. Whether a price increase is good or bad depends on whether you are buying or selling. Journalists seldom cheerfully announce “meat prices strengthened a lot this fall,” but it may be good news for farmers.
A “stronger” dollar is good news for consumers. It makes goods and services cheaper. But it is bad news for farmers, miners, manufacturers and any company or worker that faces foreign competition. If you worry about your job being outsourced, a stronger dollar increases the threat. Conversely, a “weaker” dollar hurts consumers but generally benefits producers and workers. Use of the terms “higher-priced” and “lower-priced” instead of “stronger” and “weaker” would be a step toward making that clearer.
If I tell my students that “foreign investment in the United States is increasing,” and ask their opinion, most think it good. When I say that “the United States is borrowing more money abroad,” they think it bad. But both phrases mean exactly the same thing, more capital is flowing into our country than out. To decide whether that is good or bad you need additional information.
When there are large net inflows in the capital and financial accounts of our balance of payments, there must be large net outflows in our current account. Journalists always present that as a “trade deficit,” and as bad news. Whether it is or not depends on a lot of other factors.
© 2006 Edward Lotterman
Chanarambie Consulting, Inc.