Strong dollar results in trade surplus and weak dollar results in trade deficit."?
Please help me understand this question and figure out an answer. Thanks!
Answer:
No. I do not agree with the statement that 'Strong dollar results in trade surplus and weak dollar results in trade deficit' because it is not correct.
What is true is as follows: If the dollar strengthens, imports become less costly in dollar terms to US buyers but US goods becomes more expensive for foreign buyers who have to shell out more of their domestic currency to buy each dollar worth of US goods. As a result, demand for imports by the US from foreign countries should tend to rise, while the demand for US goods from foreigners should tend to decline. This in turn should tend to increase imports by US and decrease exports by US. So at the margin this should tend to increase a trade deficit or decrease a trade surplus. IF the dollar weakens, clearly the recerse thing should tend to happen: US buyers will find foreign goods costlier whime foreign buyers will find US goods costlier, thus leading to more US exports and less US imports, thereby reducing an existing trade deficit or increasing a rade surplus.
Howevever, all this happens when the US trading partners are also largely market based economies rather than command/ controlled economies like China. For example, China has a trade surplus with US which should have made Chinese yuan stronger enough, but the Chinese Govt. fixes the US exchange rate arbitrarily low so that Chinese good remains cheaper to US buyers. Also, the Chinese people cannot easily buy US goods because most Chinese are very poor or the Govt. does not allow them or both.
Economics is fairly cmplex !!
A strong dollar will result in a trade deficit because our goods are more expensive as imports.
A weak dollar should result in a trade surplus because our goods are cheaper.
HOWEVER...our dollar is very weak now and we're still running a trade deficit especially with China.
Not only that, but the question is sort of backwards. The exchange rate is determined by the supply and demand for currency, which in tern is determined by the supply and demand for a nations goods and assets. It is the demand and supply of these that first determine the rough proportion of goods and assets (thus resulting in a trade deficit or surplus) and that determines the exchange rate. The change in the exchange rate that comes about will magnify these effects, and perhaps cause various problems. But these are secondary effects. If people demand foreign cars, it will cause the dollar to drop and thus make those cars more expensive, but not to the degree that the demand will back to where it was before. The falling dollar will put pressure to buy less foreign goods in total, but again, only a small amount.
I don't agree.
basic equation would be.
export-import = trade surplus/(trade deficit)
so if you have a trade surplus of assuming 10M, and currency appreciated by 5%, and that 5% will only translate to $500K, so it will not affect your trade surplus (balance of trade)
that is my explanation
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