Question

Explain the impact on US export and import if the US dollar has appreciated in comparison with other currencies. For example, the exchange rate for the Mexican peso was 10.97 per dollar in 2003. Now in 2020, it is 20.86 Mexican pesos per dollar under this case the dollar has appreciated almost twice. Also, when the dollar appreciated slightly which is the case of the British pound from 0.62 in 2003 to 0.76 in 2020 per dollar. Also, when there is not either appreciation or depreciation from 2003 to 2020 which is the case of the Saudi Arabia currency its exchange rate remains the same 3.75 Riyals per dollar since 2003 . Then explain the impact of exports and imports under these scenarios.

Answer 1

According to the economic concept when currency appreciated its increase the cost of domestic product for the outside buyers (importer). It means the when the domestic currency (example, USD) get appreciated then the importers need to pay more in their domestic currency. So, appreciated domestic currency decrease demand for domestic products in the foreign markets. Decreasing demand for domestic products in the domestic market decrease export and decrease export decrease net export (export-import). When net export decrease its decrease AD and decreasing AD decrease output and price level in the exporter country. So, here in this case appreciated USD will negatively affect to the US export and export will decrease and decreasing export will decrease AD in the USA. Decreasing AD will decrease output and price level. Other side it will increase trade deficit and negatively affect to the BOP of the USA. If we talk about the USD/SAR then we find that  its exchange rate remains the same 3.75 Riyals per dollar since 2003 .So, it will not affect the trade deficit between US and Saudi Arabia. Now the size of impact on the economy or trade deficit or BOP of the USA will depends on the nature and size of trade between both the countries. But, if the USD is get appreciated against the most of the world currency then the favorable exchange rate with one or two countries will not support more to the US economy.