US Dollar Depreciation

Improved Essays
"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…
Empirical findings also supported the similar view that depreciation of a nation’s currency will shift its trade balance towards surplus only if it can fulfill the Marshall-Lerner condition, or in other words, if the combined elasticity’s of demand for exports and imports is elastic (i.e. 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 improvement in the current account position of the United States by cutting the cost of importing goods and

Related Documents

  • Great Essays

    This diagram demonstrates the relationship between the size of a tax and tax revenue. A tax is a wedge between the price buyers pay and the price sellers receive on a good; it raises the price buyers have to pay for that good, and lowers the price sellers receive on that same good. Tax revenue refers to the amount of money received from taxing a good (Mankiw, 2015). The Laffer Curve illustrates that initially, as tax size increases, tax revenue increases. After a while, though, when tax size keeps increasing, tax revenue actually starts to decrease at some point.…

    • 1219 Words
    • 5 Pages
    Great Essays
  • Improved Essays

    The pound fell to a 31-year low against the dollar, which is an alarming sign. Investors have the right to worry because the exit can hurt the investment in the country and the financial sector. Though the pound is dropping against the dollar, investors are leaning towards companies that export goods on the stock market. Since the pound is weaker, companies can increase profits from exporting. However, analysts believe if investment continues to fall within the country the gains on the stock market will be minimal.…

    • 1042 Words
    • 5 Pages
    Improved Essays
  • Improved Essays

    "Currency War and its Impact on the Global Economy" 1.) Introduction: Currency war or competitive devaluation, is a situation in which countries try to gain a trade advantage over other countries by causing the exchange rate of the domestic currency to fall in relation to other currencies. Every country would want to prosper, but why does it depreciates its currency? There are 3 reasons: Firstly, to boost the exports. Secondly, to reduce the trade balance deficit and thirdly to reduce the debt burdens.…

    • 1747 Words
    • 7 Pages
    Improved Essays
  • Improved Essays

    The increase of interest rate would appreciate the dollar value, making the US goods more expensive and less attractive for the UK, therefore the US net export would decrease. High-interest rates would attract more investment to the USA and that capital inflow would affect the exchange rate to appreciate; the increase of exchange rate reduces exports because the UK would need more British Pounds to buy USA goods and services. A strong dollar discourages exports and makes imports cheaper. For example, considering that 1.35 US dollar is worth 1 British Pound, a $10 calculator manufactured in the USA and exported to the UK would cost £7.41. But, now let’s suppose that $1 equals £1.20, the same $10 calculator would cost £12.…

    • 958 Words
    • 4 Pages
    Improved Essays
  • Improved Essays

    The government has withdrawn from most areas of the market, and competition in sectors such as financial services has increased. Employment is good as always where unemployment rate dropped from 5.7% to 5.6% (Economy.com, 2016), but the part time jobs are dominating. Since inflation rate and interest rate are both low; the economy is supposed to grow faster, it will also make it cheap for business to borrow money to invest in new shops and factories; lower interest rates on deposits so consumers spend more instead of saving; lowering the exchange rate so importing is harder and exporting is easier. GDP and industrial production have experienced an increase and shown a sign of strength and positive impact on the…

    • 799 Words
    • 4 Pages
    Improved Essays
  • Great Essays

    Thus people choose either invest in something that will returns more to balance inflation, or they purchase some fixed assets to store their wealth. However, when people know that money will worth more in the future, the risk-averse people will consider to save the money rather than invest or consume something. Therefore, the national output will fall due to the investment and consumption falls (Y = C + I + G + NX). Another way to explain the nation output falls can be illustrated by AD-AS mode. The deflation leads a negative shock in aggregate demand, therefore the AD curve shifts to the left, both of the price level and real national output falls.…

    • 1183 Words
    • 5 Pages
    Great Essays
  • Superior Essays

    This fall in aggregate demand will lead to lower inflation. However, if there is a decline in Real GDP, firms will employ fewer workers leading to a rise in unemployment.” Furthermore Hoover (2008) brought forward that “when unemployment was high, wages increased slowly and when unemployment was low, wages rose rapidly.” In the short-run Phillips Curve the level of inflation depends on the given level of unemployment thus the curve slopes downwards. The main reason that the curve is downward sloping is that there is ‘money illusion’; Cunningham (2012) demonstrated that “in short run wages are not renegotiated which means that there are some wage contracts which are not affected by the increase in the money supply and growth.” This therefore brings forward that when there is an increase in the supply of money, it will result in an increase in the inflation rate…

    • 1191 Words
    • 5 Pages
    Superior Essays
  • Superior Essays

    This makes it harder to compete when selling goods abroad. At the same time and in the opposite way, if a currency goes down in value, industries which export a lot of goods get cheaper which makes them richer (Kouparitsas, 1998). When currencies get weaker or stronger, if it is as a result of what is happening to other countries or because they have found a way to become more efficient, then this might not be a problem. On the other hand, if the exchange rates that float can go up and down because of investors who want to make money due to interest rates in the short term, this may cause problems for the country as the currency could become too weak or too strong compared to the way the economy is. If a country has a fixed exchange rate, this wouldn’t happen because it’s not possible to move the exchange rate because of the central bank taking action if the rate moves.…

    • 1997 Words
    • 8 Pages
    Superior Essays
  • Improved Essays

    The Brookings Institute published research showing that although tax cuts have shown to increase earnings, there are many negatives that follow this growth. One negative is that such cuts can “subsidize old capital”, which results in “windfall gains”. From my interpretation, this means that producers are earning a certain return on their investment which is beginning to deteriorate. Normally, they would be required to re-invest in order to continue earning their required return on capital. However, with the tax cut, they are now achieving their sought after return on capital, no longer being required to invest in new growth opportunities.…

    • 855 Words
    • 4 Pages
    Improved Essays
  • Improved Essays

    Demand Side Policies

    • 842 Words
    • 4 Pages

    On the other hand, supply side policies reduce structural unemployment, the natural rate of unemployment. (Pettinger, 2011) Demand side policies are significant when a recession occurs and there is a growth in cyclical unemployment. John Neville argues that in the golden age, fiscal policy was an important expansionary instrument and that expansionary fiscal policy should be used to achieve lower unemployment. (Bell, 2000) In this case, fiscal policy can decrease unemployment by helping to increase aggregate demand and the rate of economic growth. This would in turn, shift the aggregate demand curve to the left and thus indirectly increase demand for labour.…

    • 842 Words
    • 4 Pages
    Improved Essays