This document discusses the challenges of determining causation when analyzing the relationship between exchange rates and exports using limited data from individual countries. Complex economies involve many interconnected factors, making direct causation difficult to identify. While exchange rate changes may theoretically cause export changes, in reality other variables are also changing simultaneously. The author uses Peru as an example, finding its currency appreciated against the dollar from 2002-2012 as trade balance increased, though the relationship became less clear from 2010-2012. Overall the document cautions that the best we may be able to identify is correlation rather than direct causation from such analyses.

1. So this may likely be the last part of this
research to do until the end of the
semester…
Now we will add exchange rates to the
research, which might not be so easy to
make a connection for some…

2. This is the part that is a little
dangerous/frustrating about doing this
research…
So a couple of points before getting
started…

3. The theory we are studying in class is about understanding causation
原因, how something like a change in exchange rates can cause a
change in exports. So, if there is a change (Ceteris Paribus) what is the
result?
Well…
Problem is the world is really complex…
(countries are NOT Ceteris Paribus in real life)
Correlation vs. Causation

4. Sometime the best we can do is correlation相关. These things tend to
move in the same direction, but there are lots of other factors that may
be happening. We might be looking at some pieces of information but
the real cause of a change might be due to some other information that
we haven’t found, didn’t notice, or didn’t realize to even look for.
Correlation vs. Causation

5. Countries that have more complex trade (such as China) will be harder to see a direct
causational relationship because there are so many factors, some move left, some
move right, or even both at the same time, so all we can see is the NET amount that
changed.
Example:
- 10% of the population works in the exporting sector
- 20% of the population works in the importing sector
- A depreciated exchange rate with help 10% of the population but hurt
20% of the population.
So 30% of the economy can be direct effected by the depreciation, but
also it may not be immediate, it may take a while to have an effect.
Example of the problem I am saying…

6. If I change these numbers to a smaller percentage in total, then it’s even harder to
see that it has a direct impact on the economy. The theory is still true and still works
but might be harder to see because the economy is not Ceteris Paribus an sooooo
many things are happening.
Example:
- 1% of the population works in the exporting sector
- 2% of the population works in the importing sector
- A depreciated exchange rate with help 1% of the population but hurt
2% of the population.
So 3% of the economy can be direct effected by the depreciation, but also
it may not be immediate, it may take a while to have an effect. It might
be hard to notice when it’s like this.
Example of the problem I am saying…

7. For example, China exports to a lot of countries! Almost all of them!
The RMB might depreciate against the US, but maybe also appreciated against Japan
and Hong Kong at the same time, so hard to see the total change maybe…

8. China also exports a super lot of different things. Mostly it’s electronics
and similar things, but still, a lot of different products.
A depreciation of the RMB might be affect electronics (blue) a lot, but it might not
affect minerals (brown) or textiles (green) very much so, hard to tell totally.

9. Venezuela on the other hand, doesn’t export to as many countries so it’s
easier to see how a change can happen….
If there is a depreciation against the US that can definitely have an impact that
is noticeable.

10. And you can see that they don’t produce a lot of different things, so if a
depreciation causes a change in export demand, that oh yes! It will be easy to
see the impact!

11. So all this means that the theory that I want you to
explore with the exchange rates with your country may,
or may not, be easy to identify.
Also we might run in to this chicken or egg problem with
the small pieces of information that we are using.
Did the appreciation cause the exports to increase?
Or did the exports increasing cause the appreciation?
You might not be able to see direct
causation, but perhaps some correlation,
or… perhaps not only very weak way.
Doesn’t this sound fun?

12. Also we might run in to this chicken or egg problem with
the small pieces of information that we are using.
Did the appreciation cause the exports to increase?
Or did the exports increasing cause the appreciation?

13. First part is to try to
understand the real
exchange rate in your
country compared to the US
dollar.
The reason it’s all against the
US dollar is because the US
dollar is currently the
world’s reserve currency, if a
country wants to buy and
sell things to other countries
such as oil, most of those
transactions are going to be
done with dollars.
http://www.economist.com/
content/big-mac-index

14. I can see that Peru’s currency
is undervalued compared to
the US dollar.
http://www.economist.com/
content/big-mac-index

15. You can also go to this website to
convert the currency and answer
the questions about the real
exchange rate value.
http://www.bigmacindexconverter.com/

16. Now we will mostly use this one too:
http://www.theglobaleconomy.com

17. If you have VPN trouble you can use this one, but I will
still use the other one throughout this PPT.
https://tradingeconomics.com/

18. Click here to find your country, I will use Peru again.
You must use the same
country you used last time.

19. Find your country on the list:

20. Scroll down the page until you see the title that says
“International transactions (annual)” The website can
updated and changed a little since the last time.

21. The main graphs to use is the first one about the exchange rate per U.S.
dollar and comparing the change in it to the change to the balance of trade.
Make sure again to use, billions of USD, NOT to use percent of GDP

22. This links you need
to find the needed
graphs are here:
Change the dates
to 2000 -2015 here:
Change the graph
to be a line graph
here:

23. These are the graphs we wish to have and to collect for
this research assignment. Just like before.

24. Your goal is to collect some data on your country and
based on what you have learned true to come up with a
plausible story that explains what you see happening.
This likely WILL require you to do some research beyond
the websites I’m showing here to figure it all out.
Part of the purpose here, is for you to use your research skills, and to use
what you have learned in class to practice trying to understand things…

25. Here is Peru’s exchange rate to the US dollar.
Notice the graph is trending down from about 2002 to 2012….
This shows LESS Peru SOL (their money) for each USD
About 3.5 SOL per 1 USD to
about 2.7 SOL per 1 USD
This means the SOL
is appreciating!!!

26. I can see that Peru’s trade balance increased over this same time
from 2002-2012. (except for the 2008 crisis – but that fall is actually
helpful in analyzing some of this later)

27. Peru’s trade balance generally increased over this time. So the
increasing exports means there is more demand for the currency so
the increased export demand from other countries seem to be
helping to make the exchange rate appreciate over this time period.

28. Yet from 2010-12 the exchange rate continued to appreciate but now
the trade balance was actually decreasing at this time.
There can be a number of issues involved here, including this: the
Marshall Lerner Condition – a topic for further discussion in class
https://www.tutor2u.net/economics/reference/exchange-rates-marshall-lerner-condition
I am an important link!

29. But also… if I break it up deeper and notice that even though the
trade balance was decreasing at this time, if I only look at the
exports by themselves, I can see it was still going up at this time, but
slowing down and eventually peaking.

30. So looking at imports too, it was a similar trend but the numbers
didn’t peak as high, but also didn’t fall as much as exports later did.
I understand these graphs aren’t very large or detailed, so this
analysis isn’t perfect, I’m just trying to understand the general
trends and see how the theories covered in class seem to work.

31. So …..
Why is the demand for exports helping to raise the exchange rate at
this time period?
But…not the other way?
Why isn’t the appreciation lowering the amount of exports here?

32. Well I can come back to here to see who does Peru sell to?
Well in 2002 it was mostly to the US, UK, Switzerland and China

33. But by 2014 it’s mostly to China!
I know that China has developed more and become richer at this time! So that’s it!

34. Mostly things that change in demand for imports and exports
Mostly things that change the demand for investments
1.) Consumer Tastes
2.) Relative incomes (booms and recessions)
3.) Relative prices (PPP) (Inflation)
5.) Speculation
4.) Interest rates
4.) Change in Equilibrium – Reasons
Reasons that change on the Current Account side
Reasons that change on the Financial Account side
6.) Government debt
7.) FDI or Portfolio investment
I know China is
developing and growing
and becoming richer!
Peru is selling more
exports to China
because they are richer,
so even if the currency is
appreciating, China is
still hungry for more
Peru exports and have
more money to buy
them! Selling more
exports is causing he
appreciation!

35. Also, even though Peru’s currency had been appreciating,
it always stayed undervalued compared to the world
reserve currency of the US dollar.

36. Lucky for me, also Peru has this graph that shows the growth of exports.
Not every country has this, but it does help to show that even though the
TOTAL exports has grown, it is growing at a slower rate, (appreciation might
help this to happen too) also with a lot of seemly short run cyclical changes.

37. So now I want to find a reason for these changes…
I understand, it might be obvious to find a strong causation of these changes or
maybe the best I can do is find a correlation of some kind.
It might be hard to explain the entire curve so I’m just going to pick one year to
see if I can figure out what happened.
So I picked the year 2013…

38. So I googled this…
And after some searching a found a few links that help to
adequately explain the change in exports, which in turn
helped to change the exchange rate in Peru…

39. I found this site stating how China’s
demand for Peru iron ore increased,
but then fell.
Basically demand for natural
resources went crazy high, and prices
went high so supplier happily
supplied more, but by around 2013,
demand began to slow down and
there was excess supply.
Basic supply and demand ideas…
Peru’s exchange rate correlates very
nicely with this increase for exports
(appreciates) then decrease for exports.
(depreciates)
http://money.cnn.com/2015/07/31/investing/metal-prices-
falling-emerging-markets/

40. I found that iron ore prices (which is one of Peru’s largest exports) had a huge
increase from 2008, peaked around 2012 and fell by 2015.
These increases and decreases correlate some as well with some of the trends
in Peru’s BOT and exchange rates
http://www.indexmundi.com/commodities/?commodity=i
ron-ore&months=180

41. I also found that Peru’s largest copper
mine stopped producing in 2011
because of environmental concerns,
which also helped to contribute to it’s
decrease of exports.
But also…
Investments in new mines are finally
opening and Peru is expected to
export more again.
This actually has happened, and with
an already depreciated exchange rate
and lower prices for copper maybe
this can help to increase some
demand for copper later for Peru’s
exports…
http://www.mining.com/peru-set-to-regain-worlds-
second-largest-copper-producer-place-this-year-26694/
If I would have known this earlier I
could have made some good profitable
investments…

42. So this is basically what I want you to try to do with
your country…
I know this seems like a lot, and it kind of is.
This is why I will give you a lot of time to do it and to
do it twice, to do what research you can and submit a
rough draft and I can look at it and give you some
advice to see if you can improve, if the logic makes
sense, or if there is another way to view the scenario.

43. One last thing….
Some of your countries might have a fixed exchange
rate, meaning that the exchange might not even
change with the changing exports and imports….
For Example:
China has a fixed exchange rate,
these rates that go up, down, and
straight, are all controlled by the
government.
It actually was appreciating,
because the government allowed it
too.

44. If your country has a fixed exchange
rate, you can view the amount of
foreign reserves the country has to
see if it correlates with a change as
they use reserves to offset pressure
for the exchange rate to change.
This might need you to also connect
this to the increase or decrease of the
financial account as well.

45. - What is your countries real exchange rate compared to the US dollar in terms of McDonald's hamburgers?
- How has that real exchange rate changed between the years of 2000-1015.
- Explain what this real exchange rate implies about your country's currency.
- What is your country's nominal exchange rate compared to the US dollar?
- How has that nominal exchange rate changed between the years of 2000-2015?
- How does any change in your country's exchange rate relate to your country's BOP?
- Based on your research, and supported with evidence including BOP and/or news articles, what has been the
cause of any changes in the nominal exchange rate? If the exchange rate is fixed, what evidence is there to
show that there has been pressure for the exchange rate to appreciate or depreciate?
I ask again to submit everything into one single file, as a PDF, word, PPT, etc. Written in a formalized way
with a introduction, body paragraphs with evidence, and a reasoned conclusion based on your research and
evidence. I understand this won’t be that easy, if it was so easy then it’s not worth doing anyway. This is why
I expect this to be done in 2 parts. You are to submit your first draft I will then look over it and try to give you
some advice or help and then have to submit it again with revisions as I completed work.
Questions to answer:
So your homework….
1.) Use the same country you had before for the last research assignment. If you
cannot or have a problem, please let me know.