Question

a) A country produces computers. If the pretrade domestic price for computers is $ 900, and the world price for computers is $ 1200, will this country export or import computers?

(b) Say the US dollar appreciates against other currencies. What will happen to US exports? To US imports?

(c) Say US interest rates increase over Japanese interest rates. Will the US dollar appreciate or depreciate against the Japanese yen?

(d) Say the US economic growth rate increases over the Canadian economic growth rate. Will the US dollar appreciate or depreciate against the Canadian dollar?

Answer 1

(a) When world price is higher than domestic price, domestic demand is lower than domestic supply, and producers are left with excess supply which they will export at the higher world price. So this country will export computers.

(b) An appreciated dollar makes domestic goods more expensive and foreign goods cheaper. So US exports will decrease and US imports will increase, which will decrease net exports.

(c) When US interest rate increases, global investors will find US more attractive as an investment destination, so global investment in US will increase. This will increase the demand for dollar compared to demand for Yen, so US dollar will appreciate (and yen will depreciate).

(d) When US growth rate increases, US import demand will increase faster than US export demand, which will decrease US net exports. This will decrease the demand for US dollar compared to demand for Canadian dollar, so US dollar will depreciate (and Canadian dollar will apppreciate).