Disequilibrium, Equilibrium, and Flexible Exchange Rates
Many years ago, while I was talking with an esteemed colleague, I said something about some market's being out of equilibrium. He reacted pretty strongly, saying that if a market appears to be out of equilibrium then I hadn't taken into account all the relevant variables. Good advice.
So what is happening with prices in Canada and the U.S. now that the U.S. price of a Canadian Loonie has risen to about 94cents? Back when the U.S. price of the Canuck Buck was 84 cents, prices of goods seemed to pretty much reflect purchasing power parity, and there wasn't a tonne of cross-border shopping. But now goods from the U.S. are so much cheaper. Manufacturers in Canada are finding it harder to sell their products in the U.S., and many more Canadians are engaging in cross-border shopping. I find it much more attractive, myself, to order things from the U.S. than from Canada.
As an example, consider any item listed at both Amazon.com and Amazon.ca. A year ago, the price spread was off-putting, but not so much as to keep me from ordering things now and then from Amazon.ca, especially since the Amazon.com free shipping offer for large orders does not apply to shipments to Canada. But now, even without free shipping on larger orders, most things are much cheaper when ordered from Amazon.com instead of Amazon.ca. Prices in Canada and the U.S. simply are not adjusting to the shifts in supply and demand that follow from the recent, sizable jump in the U.S. price of the Canadian Loonie.
In a model of purchasing power parity in a flexible exchange rate regime, one would expect that the prices of goods and the prices of currencies would adjust so that the same book would cost the same for me to buy in either Canada or the U.S. But prices and exchange rates simply are not adjusting that quickly. Books still have Canadian prices stamped on them that are maybe 30 - 50 percent higher (nominally) than the U.S. prices.
Of course many other things determine prices and exchange rates (try oil and other resource price swings, inflationary expectations, political uncertainties, etc.), but if the prices stay the way they are, also look for Amazon.ca to have to lower its prices eventually. Also look for Chapters-Indigo to have to lower its prices, too. If they don't, watch for some outlets to close.
But these changes do not happen overnight or instantaneously. Rather, it takes time for customers to adjust to purchasing things from different sources. And it takes time for many merchants to adjust their prices to new market realities.
It is easy for us to draw the graphs and shift the curves, but we are not price searchers in an uncertain world; these movements do not happen automagically and immediately without decision-makers contemplating them and trying to reformulate their own expectations. Retail merchants, though, should be seeing these changes on the horizon and making plans now to deal with them.
So what is happening with prices in Canada and the U.S. now that the U.S. price of a Canadian Loonie has risen to about 94cents? Back when the U.S. price of the Canuck Buck was 84 cents, prices of goods seemed to pretty much reflect purchasing power parity, and there wasn't a tonne of cross-border shopping. But now goods from the U.S. are so much cheaper. Manufacturers in Canada are finding it harder to sell their products in the U.S., and many more Canadians are engaging in cross-border shopping. I find it much more attractive, myself, to order things from the U.S. than from Canada.
As an example, consider any item listed at both Amazon.com and Amazon.ca. A year ago, the price spread was off-putting, but not so much as to keep me from ordering things now and then from Amazon.ca, especially since the Amazon.com free shipping offer for large orders does not apply to shipments to Canada. But now, even without free shipping on larger orders, most things are much cheaper when ordered from Amazon.com instead of Amazon.ca. Prices in Canada and the U.S. simply are not adjusting to the shifts in supply and demand that follow from the recent, sizable jump in the U.S. price of the Canadian Loonie.
In a model of purchasing power parity in a flexible exchange rate regime, one would expect that the prices of goods and the prices of currencies would adjust so that the same book would cost the same for me to buy in either Canada or the U.S. But prices and exchange rates simply are not adjusting that quickly. Books still have Canadian prices stamped on them that are maybe 30 - 50 percent higher (nominally) than the U.S. prices.
Of course many other things determine prices and exchange rates (try oil and other resource price swings, inflationary expectations, political uncertainties, etc.), but if the prices stay the way they are, also look for Amazon.ca to have to lower its prices eventually. Also look for Chapters-Indigo to have to lower its prices, too. If they don't, watch for some outlets to close.
But these changes do not happen overnight or instantaneously. Rather, it takes time for customers to adjust to purchasing things from different sources. And it takes time for many merchants to adjust their prices to new market realities.
It is easy for us to draw the graphs and shift the curves, but we are not price searchers in an uncertain world; these movements do not happen automagically and immediately without decision-makers contemplating them and trying to reformulate their own expectations. Retail merchants, though, should be seeing these changes on the horizon and making plans now to deal with them.
Category: Economics, International Trade and Finance Posted on
Tuesday, June 26, 2007 at 1:11pm
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This doesn't mean that agents are not using, out of their policy space, the policy which maximizes their present value subjective satisfaction, *every* constraint taken into account.
What you're saying look more like a reason to distrust old-skoool, partial equilibrium, supply&demand models. Not the notion of equilibrium as such.
You prefer to say "disequilibrium". Others prefer to apply a different notion of equilibrium. The difference might be linguistic...
The real issue is, I think, if at any one time, an individual might have done better than he did, ex ante judged, taking into account *all* constraints. But we'll probably *never* know the answer to that question...
For me, the practical/methodological answer is "no". People do as best as they can, everything considered (including, let's say, stocks of willpower and attentiveness). So we're always in a sort of loosely defined Nash equilibrium.