Essay on Exchange Rate and Balance of Payments

1386 Words Apr 9th, 2008 6 Pages
1. We chose Japanese Yen as are benchmark exchange rate because Japan is part of the G-10 Countries with U.S. and one of the major economies in the world. Japan is also a Key U.S. Business Partner in importing and exporting goods and services. Through our findings we have developed our insight of the Japanese Yen being very volatile to the dollar. In the graph shown below, we can conclude that from 1995 till 1999 the Japanese yen was weaker against Dollar. The process has been repeated between the years 2001-03 and 2006-recent.

2. Balance of Current Account shows one country’s Export and Import in Goods and services. In the U.S. case since 1995 the Balance of Current Accounts has been constantly growing deficit as shown in the Graph
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From mid 1998 through 2000, the Dollar was depreciating against the Yen but the Deficit was increasing till 2000 when it reached $80 billion. Although the year following the deficit started to decrease and by 2003 it was just over $66 billion. This explains the J-Curve effect which refers to the initial deterioration and eventual improvement of the trade balance, following a depreciation of a country’s currency.

5. The idea of a "strong dollar" means that each dollar can be exchanged for an increasing amount of foreign currency. The strength of the dollar has an impact on both imports and exports. Goods and services from another country are usually purchased in the currency of the producing nation. For example, under a string dollar, we can expect imports to increase and exports to decrease because the dollar will buy a lot of foreign currency while it is expensive for other countries to purchase dollars with their currencies. On the other hand, we can expect an increase in exports and a decrease in imports under a weak dollar. Our desire for a strong or weak dollar depends on the state of the economy. Currently, we are in a period of stagflation, which means that there is slow economic growth coupled with an increase in the prices of major necessities like food, shelter, and transportation. The value of the dollar is currently depreciating against major currencies, which has led to the recent increase in oil prices to over $100 per

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