Three Notes on Economies
Interest Rates and foreign exchange rates
Interest Rates and foreign exchange rates are two sides of a coin. While interest rates capture the domestic cost of funds, foreign exchange rate indicate the external cost of funds.
There are essentially two economies:
a. Real economy with an underlying product and services market
b. Monetary economy with an underlying financial market
When productivity increases, that is when real economy grows, the cost of funds, that is real rate of funds comes down. High growth, low inflation - Appreciation - Strong currency
Incremental Capital Output Ratio
The incremental capital output ratio (ICOR) is defined as the ratio between investment in some previous period(s) and the growth in output in the subsequent period. ICOR has been used since the 1950's, and is still used by the Bank and other international organizations for instance to measure required investment to reach the targeted GDP growth.
- Lower the better. India better than China in terms of ICOR.
DXY index dollar index against 5 currencies.
The United States Dollar Index or DXY measures the performance of the dollar against a basket of other currencies including EUR, JPY, GBP, CAD, CHF and SEK. Historically, from 1967 until 2013, the DXY averaged 98.0100 reaching an all time high of 164.7200 in February of 1985 and a record low of 71.5800 in April of 2008. The United States Dollar Index or DXY measures the performance of the dollar against a basket of other currencies including EUR, JPY, GBP, CAD, CHF and SEK.