ECON 20 Lecture Notes - Lecture 28: Aggregate Demand, Microeconomics
Document Summary
U. s. imports have been much higher than u. s. exports for some time. The gap declined during the great recession period, but it remains large. This inflow of imports puts downward pressure on the dollar. The dollar"s value will fall at a modest rate over a long period of time. This would encourage u. s. exports and would eventually lead to the closing of the gap between exports and imports. If this adjustment process is effective, exchange rate movements offset trade deficits over time. Thus, the trade deficit has a tendency to self correct. as a practical matter, however, the u. s. trade deficit has been quite persistent even as exchange rates have moved. Some economists, however, strongly believe that the trade deficit will eventually be closed by movements in the exchange rate. Note that the following arguments hold for any currency. A strong dollar increases the purchasing power of u. s. citizens buying foreign goods.
