When Prices Are Sticky Downwards
Economic inefficiency can be pretty costly to you and me
Consumers like you and me are no doubt heartened with the new strength of the ringgit against the US dollar, trading at around 3.20 to one US dollar. Not long ago, it was 3.50, representing an appreciation of around 9%.
And if the dollar goes down to 3 by year-end as many economists expect, the appreciation in less than a year, will be as high as 17%.
The question is will we consumers see a significant reduction in the prices that we pay for imported goods or are the importers going to slice the benefits all to themselves?
This is what economists mean when they refer to prices being “sticky downwards”. When costs go up, prices rise quickly, sometimes even before the costs are incurred by producers and importers. But when they go down, prices adjust slowly or not at all.
If we do get the full benefits, then our standard of living will improve and our incomes will go a longer way, and our journey to becoming a higher income country will be made easier.
For that to happen, we must ensure that our economy is efficient and that prices reflect the appreciated currency. One way of doing this is to police product prices and lean on those who are slow to bring down prices.
The other, which is more effective in the longer term, is to loosen up the procedure for imports by cutting red tape and approvals needed and simply allowing more people and companies to import.
The competition will then bring the prices down to an even keel for all products from butter and milk to cars and trucks.
http://biz.thestar.com.my/news/story.asp?file=/2010/4/17/business/6074680&sec=business
Consumers like you and me are no doubt heartened with the new strength of the ringgit against the US dollar, trading at around 3.20 to one US dollar. Not long ago, it was 3.50, representing an appreciation of around 9%.
And if the dollar goes down to 3 by year-end as many economists expect, the appreciation in less than a year, will be as high as 17%.
The question is will we consumers see a significant reduction in the prices that we pay for imported goods or are the importers going to slice the benefits all to themselves?
This is what economists mean when they refer to prices being “sticky downwards”. When costs go up, prices rise quickly, sometimes even before the costs are incurred by producers and importers. But when they go down, prices adjust slowly or not at all.
If we do get the full benefits, then our standard of living will improve and our incomes will go a longer way, and our journey to becoming a higher income country will be made easier.
For that to happen, we must ensure that our economy is efficient and that prices reflect the appreciated currency. One way of doing this is to police product prices and lean on those who are slow to bring down prices.
The other, which is more effective in the longer term, is to loosen up the procedure for imports by cutting red tape and approvals needed and simply allowing more people and companies to import.
The competition will then bring the prices down to an even keel for all products from butter and milk to cars and trucks.
http://biz.thestar.com.my/news/story.asp?file=/2010/4/17/business/6074680&sec=business
