Over Valued Currency One

Over Valued Currency One

Over-valued Currency, one whose exchange value in terms of other currencies is kept higher than it would be without Government support. An equilibrium rate of exchange between two currencies is that which, taking good and bad years together, would secure a balance of international payments between the two without restrictions on the demand for foreign currency (protective tariffs, import restrictions, exchange control or deflationary measures to reduce domestic employment and output). Such policies can keep the exchange rate higher than the equilibrium level. A country may have an over-valued currency as deliberate policy, as a device to extract (at the expense of other countries) the maximum gain from trade, or inadvertently because of ignorance and uncertainty. For example, the exchange rate may have been fixed at what appeared to be an equilibrium level which was subsequently seen to be an over-valuation; or trading conditions and capital flows may have changed radically since the exchange rate was fixed, without clear indication whether the change was temporary or permanent.

Overfull Employment, a situation in which the rate at which new vacancies arise in firms exceeds the rate at which workers are entering the labour market, voluntarily or involuntarily. The pool of unemployed is thus insufficient to enable firms to fill vacancies fast enough to avoid dislocation of production and competitive bidding up of wages beyond the average increase in productivity. Economists' estimates of the level at which employment becomes overfull vary from 95 to gS per cent. Some have argued that dislocation of production may be avoided with 2 per cent unemployed, but that in a dynamic economy 2'5 per cent or even more unemployed changing jobs may be necessary to escape wage inflation.

The ability of workers to find another job quickly should they wish or have to is a characteristic of full employment which is reinforced in conditions of overfull employment. Total output is high (even if not at the maximum attainable without dislocations) and possibly higher than with full employment because severe labour shortage stimulates firms to evolve labour-saving methods of production.

Nevertheless, overfull employment may be considered undesirable because of its association with inflation. Excess demand in the labour market must reflect excess demand in product markets. Rising prices are therefore an inevitable accompaniment of overfull employment. These price increases arising from the pull of demand are further stimulated by the push of rising wage costs as fins work overtime, hoard labour, bid it from one another, tolerate inefficiency and indiscipline, and concede general wage awards to the strongly placed unions. Rising prices are unjust to people living on fixed incomes; they lead to balance of payments problems because imports are increased and exports discouraged; and they may increase uncontrollably if many people anticipate further rises.

Further reading Economic - Phd In Economics


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