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Determinants of consumption demand

This text discusses the determinants of consumption demand and the current account, focusing on the correlation between consumption and disposable income, the role of the exchange rate and pass-through effects. It explores the factors influencing a firm's pricing decisions in response to currency fluctuations and analyzes the short-run J-curve effect and linkage between nominal and real exchange rates. Additionally, it addresses the impact of currency depreciation on export prices and its effect on aggregate demand.

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Determinants of consumption demand

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  1. Determinants of consumption demand consumption is positively correlated with disposable income

  2. Determinants of the current account 经常项目=实际汇率，可支配收入 All are measured in terms of domestic output

  3. Pass-through Example 1: a large foreign firm supplying automobiles to the United States my be so worried about losing market share that it does not immediately raise its U.S. prices 10 % when the dollar depreciates by 10 %, despite the fact that its revenue from American sales, measured in its own currency, will decline.

  4. Pass-through Example 2: the firm may hesitate to lower its U.S.prices by 10 % after a dollar appreciation of that size because it can thereby earn higher profits without investing resources immediately in expanding its shipments to the United State.

  5. Short-run J-curve effect A nominal currency change will be dampened by a low responsiveness of import prices to the exchange rate.

  6. Linkage The link between nominal and real exchange rate may be further weakened by domestic price response. Question: A country’s export prices rise when its currency depreciates? Change nominal exchange rate? Aggregate demand arises

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