The Importance Of Trade Depreciation

828 Words 4 Pages
"Does depreciation in the US dollar improve the trade deficit?

Introduction
What is trade deficit? Trade deficit is an economic measure of a negative balance of trade in which a country 's imports exceeds its exports. A trade deficit represents an outflow of domestic currency to foreign markets. Depreciation in value of US dollar in front of other global currencies can improve or reduce trade deficit as depreciation in dollar can reduce the trade deficit by encouraging exports as not exporters will get better returns and discouraging imports as now imports are more costly which will eventually boost exports and reduce imports. US is currently having trade defecate of $44 billion which is been increasing since decades, Earlier till 1976 US
…show more content…
To address the issue of this export –import imbalance many analysts and policy makers prescribed a dollar depreciation mechanism with a view that such a policy tool can restore the international competitiveness of US goods. The logic behind such a claim is that if dollar is depreciated against a broad basket of currencies it will not only reduce US demand for foreign products but also increase the foreign demand for American goods by making US goods more price-competitive abroad. Having such policy goals in mind a depreciation of dollar was taken place in the past few years against major currencies like Euro, Japanese yen, and Canadian dollar etc. However, recent trade data do not show any strong evidence supporting the decisiveness of the above claims. Theoretically it is obvious that a depreciated dollar will curb the US appetite for foreign goods thus narrow the trade deficit. Yet practically the discussion includes many other factors and significant dollar depreciation may improve the situation but it is unlikely to close the gap single-handedly. To understand at what extent a dollar depreciation can contribute to the issue it is vital to have a closer look on the other factors behind the U.S trade deficit and how or which extent they are affected by a depreciation of dollar might be an immediate concern of the policy …show more content…
the coefficient is greater than 1). Evidence suggests that in the US today, the Marshall-Lerner Condition is in fact being met as in the 2015 fiscal year an increase in exports of 12% in response to a 6% weakening of the dollar indicates a price elasticity of “more than one” for America’s exports, meaning foreigners are highly responsive to cheaper US goods . The ultimate result is that strong export is getting a boost from the cheaper dollar and consequently US trade deficit is narrowing gradually thereafter. We took a broader look on whether currency depreciation can be effective as a means of narrowing US trade deficits but previously in 2009 data shows that the US trade balance gets better because of a reduction in the import side of the trade account. Evidence suggests no significant increase in US export of goods and services; rather in 2009 there was an unexpected immediate fall of US imports that leads to a decrease in trade deficit. One reason for such a behavior of the trade balance might be linked to a decreased consumption demand in the US economy caused by recent recession and perhaps a temporary appreciation of dollar in that specified period (2009: chart3) had a short-term

Related Documents