The Too Strong Dollar?
Fall -2002
Student Names
Group Name
Macroeconomics
Section-?
Dr. Castro
6/4/2002
Summary:
There is a new school of thought emerging when it comes to the issue of the value of the
dollar. After years of assuming that a strong dollar was good for the U.S. economy, many have
begun to rethink that idea. People are starting to debate whether or not devaluing the dollar
would be good for the economy in the long run. This is because the high value on the dollar
makes exporting U.S. goods very difficult. Due to this fact, the United States experiences an
increasing trade deficit between the amount of goods exported compared to the amount of goods
imported.
There is still debate over whether depreciating the dollar would have a positive effect on
the long-term economy. For instance, the Bush Administration says that it has no plans to
intervene in this matter. Some have attributed loss of jobs during recession to the lack of exports,
while others have stated that as the rate of import increases, our unemployment rate has gone
down (freetrade.org). One of the major spokespeople for the idea of depreciating the dollar is
Paul Volcker (Former Federal Reserve Chairman) who says that the dollar will need to be
weakened for long-run stability of the economy. Opposing this view is Robert Rubin (Former
Treasury Secretary) who says that weakening the dollar could cause adverse affect on inflation,
interest rates and capital inflows.
Questions:
If the Bush Administration were to decide that a strong dollar was no longer in its interest, what
measures could it adopt to depreciate the dollar?
The easiest way to depreciate the dollar would be to print more of them. As the quantity
would increase, the value of each bill would decrease. If this were done, one would have to make
sure that just enough were printed so that the money depreciated slightly, without completely
ruining the value altogether.
It is argued that European and Asian automakers have greatly benefited from a strong dollar.
Explain how a strong dollar would hurt U.S. auto manufacturers and favor foreign firms.
The reason that a strong dollar would benefit European and Asian automakers are that it
allows those countries to build cars less expensively because they are paying the costs in their
less valuable currency. They then import the cars into the U.S. where they are sold. After
receiving payment in dollars, the automakers can convert the monies back into their currency and
receive a larger sum of money due to the fact that they are converting a stronger currency to a
weaker one.
The reason this hurts U.S. automakers is because it costs more to produce a car because
the expenses are being paid in dollars. After the cars are exported, the American companies
receive payment in a less valuable currency, so when they convert back to dollars, they are also
loosing money.
What is the current account deficit? Why do some economists worry about the size of the deficit?
The account deficit at the time of the article writing was approximately 4-percent. As of March
2002, the account deficit for that month was –31.6 billion, see Graph 1. Using the GDP for the
first quarter of 2002, which is 9,476.3 billion, and dividing it by four we obtain the average GDP
for one month in the first quarter (2,369 billion). One can then divide the –31.6 billion by 2,369
billion and obtain a current deficit of 1.334-percent. This rate is much lower because of the
recession that just recently ended.
Graph 1: U.S. International Trade in Goods and Services
Source: U.S. Census Bureau
The reason some economists worry about the deficit is because it is relatively large in
comparison to the GDP of the nation. This shows a heavy reliance on foreign goods and would
also allow us to improve our GDP if we could reduce this deficit percentage.
Sources:
Bureau of Economic Analysis. “Latest GDP Press Release” 24 May 2002.
http://www.bea.doc.gov/bea/newsrel/gdppressrelease.htm
Griswold, Daniel T. “America's Maligned and Misunderstood Trade Deficit” 20 April 1998.
http://www.freetrade.org/pubs/pas/tpa-002.html#N_1_
South-Western EconoNews. “The Too Strong Dollar” 1 September 2001.
http://www.swcollege.com/bef/econ_news/0901/12.html
Tucker, Irvine. Macroeconomics for Today. 3rd ed. Mason, OH: Thompson Southwestern, 2003.
U.S. Census Bureau. “U.S. International Trade in Goods and Services Highlights” 17 May 2002.