Discussion Post:
dbr06
ExchangeRatesPt3v1.pptxExchange Rates: Part III
Imports, Exports and A “Strong” US Dollar
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Strong Currency
Previously we have established that a strong currency is one that is issued by a country with a stable political system and a developed economy.
And that is certainly true.
But there is another aspect to a strong currency the we need to examine.
And that is how appreciation and depreciation impacts imports and exports.
Sometimes we confuse a currency that is a strong currency with one that is continuously appreciating. And that is not a correct view.
Strength Can Vary
For this discussion we’ll just examine the US Dollar.
The US Dollar is one of the world’s strongest currencies.
But it’s exchange rate changes over time.
Sometimes it appreciates – gains value
Sometimes it depreciates – loses value
Even with those changes it is still a strong currency.
But how do the changes in the strength of the US Dollar impact the US economy?
An Appreciating US Dollar
When the US Dollar appreciates relative to other currencies, especially with our major trading partners, it is called a strengthening or stronger dollar. Or sometimes just a strong dollar.
What does this mean for US economy?
Exports and Appreciation
For exports of US goods and services the impacts are pretty straight forward.
When the US Dollar appreciates, it takes more units of another currency to buy a US Dollar.
That makes the price of US goods and services higher when viewed in terms of another currency. For example:
A US product that costs $50 in the US, will cost 5,000 Yen (¥) in Japan if the exchange rate is 1 US$ = ¥100 (It takes 100¥ to buy 1 US$).
If the US Dollar appreciates relative to the Japanese Yen to, say, 1 US$ = ¥200, then the US product how costs ¥10,000 in Japan.
What do you think will happen to US exports of this product to Japan?
You are right, exports will decline.
So a stronger US Dollar actually works to reduce the sale of US goods and services to other countries. That reduces the amount of money flowing into the US economy from other countries.
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Imports and Appreciation
How what happens to US imports when the US Dollar appreciates relative to other currencies?
A Japanese product that costs ¥20,000 in Japan will cost US $200 in America when the exchange rate is 1 US$ = ¥100
But if the US Dollar appreciates relative to the Japanese Yen to, say, 1 US$ = ¥200, what happens to the US price?
At the new exchange rate, the Japanese product now has a US price of US $100.
What do you think will happen to US sales of the Japanese product?
Yes, US sales will increase.
Thus, when the US Dollar appreciates, we import more from other countries, which means more money leaves the US economy.
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A Depreciating US Dollar
When the US Dollar depreciates relative to other currencies, especially with our major trading partners, it is called a weakening or weaker dollar. Or sometimes just a weak dollar.
What does this mean for US economy?
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Exports and Deprecation
For exports of US goods and services the impacts are, again, pretty straight forward.
When the US Dollar depreciates, it takes fewer units of another currency to buy a US Dollar.
That makes the price of US goods and services lower when viewed in terms of another currency. For example:
A US product that costs $50 in the US, will cost ¥5,000 in Japan if the exchange rate is 1 U $ = ¥100.
If the US Dollar depreciates relative to the Japanese Yen to, say, 1 US $ = ¥50, then the US product how costs ¥2,500 in Japan.
What do you think will happen to US exports of this product to Japan?
You are right, exports will increase.
So a weaker US Dollar actually works to increase the sale of US goods and services to other countries. That increases the amount of money flowing into the US economy from other countries.
Imports and Depreciation
How what happens to US imports when the US Dollar depreciates relative to other currencies?
A Japanese product that costs ¥20,000 in Japan will cost US $200 when the exchange rate is 1 US$ = ¥100
But if the US Dollar depreciates relative to the Japanese Yen to, say, 1 US$ = ¥50, what happens to the US price?
At the new exchange rate, the Japanese product now has a US price of US $400.
What do you think will happen to US sales of the Japanese product?
Yes, US sales will decrease.
Thus, when the US Dollar depreciates, we import less from other countries, which means less money leaves the US economy.
(Caution: this only applies with goods we don’t have to import or for goods for which we have a domestic substitute. We have to import coffee, for example, and coffee drinkers still buy regardless of the price.)
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Summing It Up
To sum it all up:
| US $ | US Exports | US Imports | Money Flows |
| Appreciates | Decrease | Increase | Out of the country |
| Depreciates | Increase | Decrease | Into the country |
However, what the net effect of any of these possible changes is depends on the starting position of the trade balance of the US. Thus, the tables shows the changes from some unspecified starting trade balance. It does not show the net final result.
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