Question

What impact will an appreciation of the dollar have on the relative price of foreign goods to Americans, and the relative price of American-made products to foreigners? What will likely happen to America's trade deficit?

Answer 1

Appreciation means strengthening of US dollar against other currencies. It implies that now foreigners will find it expensive to purchase the US dollar because its foreign price has increased.

When the dollar becomes expensive, goods and services manufacturer in the United States become expensive for foreigners to purchase. Therefore exports from the United States will decline because the relative price of American made products increases for foreigners. at the same time imports from other countries will increase in the United States because the relative price of foreign made goods will decrease for Americans.

This indicates that net exports will decline because exports are reducing and imports are increasing gradually. Trade deficit is the excess of imports over exports and it will increase when the US dollar is appreciated.