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Explain the valuation effect when the U.S. dollar depreciates. If we were not taking valuation effects...

Explain the valuation effect when the U.S. dollar depreciates. If we were not taking valuation effects into account, would we predict a larger or smaller depreciation of the U.S. dollar to rebalance the U.S. current account?

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Answer #1

U S dollar appreciation means more foreign currency is needed to buy each dollar. Or Dollar can buy more foreign exchange.

When US dollar appreciates then USA goods will become costlier as foreign people will have to pay more. Example $1 was equal to 75 Indian rupees. Now Dollar appreciates means 80 Indian rupees are needed to pay $1.

When USA exports same good Indian firm will have to pay 5 additional rupees. India may think of producing it India or import from some other country. This will reduce USA exports.

USA firms will find it cheaper to import goods and services as they will pay less now. Imports will go up for USA.

as exports are down and imports are more, current account balance will deteriorate for USA.

To improve U.S current account larger depreciation will be needed looking at current account defict.

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