Some of the most interesting debates in economics center around theories of Price Directionality, Durable Goods, and Production Price Fluctuations. These are terms that are used to describe how a country's economy can affect its currency in a certain direction. A nation's currency can go up or down, depending upon whether its central bank is increasing interest rates to try to raise interest rates from their current level, or if they are cutting interest rates in order to stimulate the economy further. The best way to think about it is that it is a question of market expectations.
One of the biggest theories in economic development is that goods and services growth are driven by the overall economic environment in which a country finds itself. For instance, let's say that a country has a booming economy and the central bank raised interest rates to get more money into the economy. This will lead to more goods and services being manufactured. This new wealth could be used to buy more advanced goods and services at a higher price, which will lead to more economic growth. However, if the economic climate changes as a result of a decrease in business spending, then the goods and services prices will fall.
If this occurs, the company with the capital to pay for the extra goods is likely to pass the cost along to the consumer. The consumer, in turn, will have to lower his or her demand for the product in order to balance the amount of increased money that he or she is making. The company, though, must sell the less expensive item to make up for the lost business, and if the market for the item becomes saturated, it may no longer be profitable. The company is likely to pass any lost opportunity on to the consumer. The company loses out, even though the market for the good was growing because the investment was not made into new products.
The opposite of this theory, price directionality, can be explained in a different way. Let's say that instead of increasing the market price of some goods by 10 percent because of an increase in demand, let's assume that company X produces and markets only the item at the rate of inflation plus two percent. Now suppose that the company begins to increase its production of this good while also raising its price, causing the product to become very expensive.
As the economic situation changes, more people buy the item, forcing the price to drop. That's a perfect economy of demand. If, however, the company decides to increase its production of the goods, it will raise its price again, forcing the consumer to purchase even more of the goods. This process continues until the company has exhausted all of its available supplies of the goods, leaving consumers in a bind where to buy goods or sell products to get out of the hole.
In short, the theory . . . . . . of growth in economics is not based on the concept of supply and demand. Rather, it is more related to the concept of growth in the economy, specifically the growth of income. In fact, there is another aspect altogether to this particular discussion that bears thinking on, namely the effect of trade liberalization on economic growth.
With G DP, there is a tendency for the prices of goods to increase as the domestic demand increases but the domestic supply remains constant. This is due to the fact that when the government liberalizes the export market, it encourages the movement of capital internationally, making it easier for goods to be transferred across borders. Naturally, the supply remains constant because no one is forcing anyone to produce more goods.
The end result is that as long as there are international trade barriers, goods become scarcer as the international price becomes too high. As capital flows into the country, the domestic production grows but the foreign output becomes more abundant, causing the price of goods to fall. Eventually, the government realizes that it has to devalue the currency so that exports can be reassigned to make up for the declining domestic demand and start increasing domestic production, bringing the economy back to equilibrium.