Question

What impact do you think a stronger dollar (A higher exchange rate value of the dollar - an appreciation of the dollar) would have on the relative price of U.S. exports and imports and therefore the amount of U.S. exports and imports? Would this push the U.S. in the direction of a trade deficit or trade surplus?

Answer 1

A strong dollar will push the United States in the direction of trade deficit.

Explanation -

When the dollar is strong, one dollar can purchase more goods and services from the trading country whose currency is weak relative to the dollar. In other words, a strong dollar makes imports cheaper due to higher purchasing power of one dollar. When the dollar is strong, imports surge as consumers find lower price of goods and services more attractive.

On the other hand, when the dollar is weak, the purchasing power of the dollar declines and the purchasing power of the foreign currency increases. This implies that imports decline as more dollar is needed to purchase a good or service produced abroad. On the other hand, exports increase as a higher purchasing power of the other currency implies that the foreign currency can buy more goods and services produced in the United States.

Therefore -

* Weak Dollar - Positive for Exports

* Strong Dollar - Positive for Imports

Therefore,

* A strong dollar would increase the trade deficits (exports - imports ) as exports decline and imports surge.

* A weak dollar will narrow trade deficits (exports - imports ) as exports are boosted on higher purchasing power of foreign currency.