China's Prices Undercut U.S. Tire Makers, Causing Plant Closings

Newhouse News ^ | 8/8/2006 | Thomas W. Gerdel

[justshutupandtakeit]

The first description I ever heard (from my econ professor)of a practical use for econometrics was of a student who used one variable to predict electricity demand. His finding was so robust that Commonwealth Edison hired him before he even graduated. It is likely that the model is more sophisticated now.

[curiosity]

There can be a trade deficit (X>M) in equilibrium under a floating exchange rate but it is not the same thing as a trade deficit under a fixed exchange. Under the former the excess supply of dollars causes the exchange rate to fall until a new equilibrium is reached. Under the latter the outflow of gold/specie reduces the money supply within the country causing income to fall, prices to fall and imports to follow. Exports will increase because the domestic price level deflates.

Yey! You've got it straight now! That's a nice, succinct description. Could not have said it better myself. :)

I don't see any necessary reduction in the money supply due to the deficit in the first case as there is in the second.

You're correct.

You describe the BoP deficit occurring if the authorities intervene to prevent the dollar from devaluing. How is that any different from saying that there is no deficit under a true floating exchange? Never mind, I meant to say BoP deficit earlier and said Trade deficit.

Exactly right. Didn't I tell you earlier that you had the BoP and trade deficits mixed up? I'm glad to see we're not the same page now! :)

Heller defines "the balance of payments as the difference between the quantity of dollars demanded and supplied in international currency markets."

Yes, that's a good definition and it is equivalent to the one I gave you earlier, though described in different terms. If the capital account and current account don't balance (my definition), then you must have either excess supply or excess demand for dollars.

Under floating exchange rates, you by definition can't have excess supply or demand for dollars, since the exchange rate will so that demand=supply. The same mechanism ensures that the capital and current accounts balance.

[curiosity]

The first description I ever heard (from my econ professor)of a practical use for econometrics was of a student who used one variable to predict electricity demand. His finding was so robust that Commonwealth Edison hired him before he even graduated.

I don't know the case, but I guarantee you that he didn't just estimate a single variable regression. To establish a robust relationship, you have to throw in all other plausible variables to ensure that the one being tested is what's driving things and not something else with which it is correlated.

[justshutupandtakeit]

It is not often that I get to discuss economics from a theoretic perspective and I appreciate it when things do not come out the way they are intended are challenged so that they can be corrected. Unless I am very careful things can come out the exact opposite of what I mean since we are often speaking of things going up or down so you say up when you mean down.

Econometrics is even less often discussed and I have done none in over 30 yrs so can easily screw that up.

[justshutupandtakeit]

It is unlikely you would have heard of this since there was no paper published.

But from the point of view of the company it probably is irrelevant if the variable worked because it was masking another. All it cared about was that the alledged independent variable produced a high R squared.