10.2.1 The relationship between the internal value of money and the external value of money
Definition: Internal value of money: its purchasing power over domestic goods and services (falls when there is inflation). External value of money: its value in terms of other currencies, i.e. the exchange rate.
The two are linked. If a country has higher inflation than its trading partners (its internal value falls faster), its exports become less competitive and imports more attractive; demand for its currency falls and supply rises, so the currency tends to depreciate (purchasing power parity idea). Conversely, a depreciation of the currency raises the price of imported goods, fuel and raw materials, causing imported (cost-push) inflation, reducing the internal value of money. India's large oil imports mean a weaker rupee feeds quickly into fuel and transport costs.
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- 10.2.2 The relationship between the balance of payments and inflation
- 10.2.3 The relationship between economic growth and inflation
- 10.2.4 The relationship between economic growth and the balance of payments
- 10.2.5 The Phillips curve: unemployment and inflation
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