Question

Find information on the trade balance for the US and find the comparable measures for the country you have chosen for the past three years. Discuss the trend of the balance of trade for each country. For the currency in each country (the dollar in the US and whatever the currency is called in the country you chose), find the exchange rates for the previous three years. For the US, find the exchange rate with the Euro, the Japanese Yen, and the British Pound. For your selected country, find the exchange rate with the US dollar, the Euro, and the Japanese Yen. Describe the trend of exchange rates for each currency over the three-year period — is the currency appreciating or depreciating against the other currencies? Explain how this pattern of the currency can impact the economy.

Answer 1

Apart from US, I have chosen India. The trade balance data for US and India for past 3 years is given below. App numbers are in million USD.

India-

US-

US has more than 3 times the trade deficit than India. Both countries are deficit countries. For both the trade deficit was at peak at in 2018-19 and has come down since.

The data for currencies is given below.

USD/EUR

USD/YEN

USD/GBP

INR/USD

INR/EUR

INR/Yen

On an average, USD has been appreciating in past couple of years though it was depreciating before that. INR on the other hand has been depreciating in recent years.

Appreciation fo a currency makes foreign goods (imports) less expensive. On the other hand, it makes domestic goods (exports) more expensive. So an appreciation results in worse balance of trade. A depreciation, on the other hand, results in opposite effects and hence, better balance of trade.

Appreciation also reduces inflation as imports are cheaper and depreciation has opposite effect. Depreciation reduces nominal output (if domestic currency is not USD), though it doesnt affect real output.