economics commentary Essay

Submitted By Divya-Mahajan
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Argentina is the third largest economy in the Latin Americas, and it is one of the world's fastest developing countries ;however, its economy is getting hurt since the demand for its currency is decreasing in comparison to the demand for US Dollars. Consumers are willing to purchase a greater amount of imports rather than domestic products, which causes the economy to suffer as the aggregate demand for domestically produced products decrease which will further cause the value of the Gross Domestic Product to decrease.
The initial situation is clear. Many products consumed daily have to be imported since the producers are unable to cover the cost of production. Imported goods have to be paid by in dollars which is increasing the demand for the US currency as shown in the diagram:

The diagram shows that the demand for US dollars in Argentina shifts towards the right (fig i) which emphasizes that the demand is increasing. This is because the consumption of imported goods and services is increasing, and it has to be paid in dollars. This might put the country in a recessionary gap since the value of Argentina's GDP - total monetary value of all final goods and services produced in an economy - will go through a decline as there would be a decrease in the value of net exports which is a component in the calculation of GDP. As more consumers are more willing to exchange Pesos for dollars, there would be a larger supply of Pesos which is shown by the rightward shift in the supply curve in fig (ii)(demand for US Dollars is equal to the supply of Pesos). Since there is too much Peso in circulation for goods and services available, the price also increases which causes inflation. The value of Peso has been devalued because its demand is lower compared to the demand of US Dollars. This also causes the economy's current account balance, which is the measure of flow of funds from trade in goods and services, to deteriorate. This might establish a current account deficit since the imports from other countries will be greater than the exports.
It is made apparent in the article that the main reason for the weakening of Argentine currency is the demand for the imports from other countries which is causing the demand for the US Dollars to increase. Clearly there are many other reasons for dollar to be appreciated since it has been a strong currency for a long time.
However, this is causing economic problems in Argentina as the economy will undergo inflation and also suffer from a current account deficit which will further hurt the economic growth. The country might also experience high
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