June 06, 2013
The NYT gets the economics upside down in a piece discussing the protests in Turkey. At one point it tells readers:
“And like Spain and Greece before 2008, Turkey runs one of the largest current account deficits in the world, at around 7 percent of G.D.P. That, economists say, sets in motion a vicious circle as an overheated economy sucks in imports. That, in turn, creates a stronger currency that hurts the country’s exports, forcing Turkey to borrow ever more to finance the gap.”
Okay, so we have a large current account deficit that somehow leads to an overheated economy, that sucks in imports. That in turn creates a stronger currency.
Let’s get out the textbook. Turkey has a current account deficit primarily because the high value of its currency makes imports relatively cheap and its exports more expensive for people living in other countries. The causation is from high currency value to current account deficit.
The deficit means that Turkey is buying goods and services from other countries rather than spending it domestically. This reduces demand in Turkey, making the economy less overheated, not more.
Finally the current account deficit sends money out of the country, it increases the supply of Turkish currency on international markets. That should lower the value of Turkey’s currency, not raise it.
In this context, the recent fall in the Turkish lira that is highlighted in the article would be exactly what the doctor ordered. This would make Turkish goods more competitive internationally and reduce the size of the trade deficit.
Note: Typo corrected, thanks Bill.
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