In Macroeconomics: A European Perspective (3rd ed., Blanchard, Amighini and Giavazzi), when discussing the reason for differences in the GDP deflator and the HICP for the EU, it states the following on p. 32:
In 2005 and 2006, the increase in HICP was significantly smaller than the increase in the GDP deflator. The reason is not hard to find. Recall that the GDP deflator is the price of goods produced in Europe, whereas the HICP is the price of goods consumed in Europe. This means that when the price of imported goods decreases or increases less relative to the price of goods produced in Europe, the HICP increases less than the GDP deflator. This is precisely what happened in 2005 and 2006. The euro depreciated by about 10% vis-à-vis the dollar. This made imports by the EU cheaper than before. The result was a large increase in the GDP deflator compared with the HICP.
My question: is the bold section correct?
My reasoning to the contrary is a follows. If the euro depreciates, then it can purchase less dollars than before, and so imports become more expensive. Suppose yesterday, €10 = \$20, but today, €10 = \$15 (so depreciation has occurred). Then, I needed €30 yesterday to buy \$60 worth of goods, but today I need €40 to buy \$60 worth of goods, and so imports by the EU are more expensive than before. I have no background in economics and am trying to learn introductory macroeconomics, so I have no idea if my interpretation of depreciation is even right. Otherwise though, I think there are a lot of errors in this textbook - incorrect regression equations, incorrect references etc. Has anyone else used the book and found this?
