Question

Discuss the pros and cons of having a strong dollar. Until recently, Los Angeles lost revenue and jobs to Canada because the strength of the American dollar made it cost-efficient to move movie and television production out of the country. (It should be noted that Canada also made some fiscal concessions to encourage this change of venue.) However, by 2008, the dollar had weakened so significantly that China was persuaded to announce it could no longer export rice profitably to the United States. Clearly, whether the dollar is weak or strong, there will be winners and losers in the equation. Can you think of any suggestions for equalizing the gains and losses experienced on both sides?

Answer 1

A strong dollar means we can buy more units of foreign currency with the dollar. A strong dollar benefits American consumers through cheap imports. However, the flip side to it is that the foreign exports usually do not show interest to export to the USA. You can see that in the case given in the problem. China, as it thinks not profitable to export rice, will not show interest to export to the US. Eventually, the markets will adjust for these differences and bring the dollar back into parity conditions. A strong dollar, on the other hand, hurts the US companies those who depend on bulk exports, because they will now experience a slowdown in exports due to expensive imports for foreign countries. As mentioned in the case, the production and operations will leave the country (the US) to elsewhere in order to make them cost-efficient (as is the case with the US movie and television industry in the case given). Hence, the US should think of a win-win situation on the dollar appreciation. On the one hand it should retain the core manufacturing investment in the country and on the other hand it should attract more foreign currency thorugh FDI and exports to other countries. The US should have a industry-wise subsidies and a strong foreign policy to solve this puzzle.