Question

Is a weak dollar good for the U.S. economy? Why or why not? Why has the US. Trade deficit been slow to respond to the weakened dollar?

Answer 1

Weak Dollar Results and Good or Bad?

The economy of the United States, is one which has high exports as well as imports from most regions across the globe. The country is rich in capital reserves which are heavily invested to generate profits over time. As it is accepted as the global currency, the demand for this remains extremely high, and this gives a push to the exchange rate, which goes up over time.

Further to this, a weak dollar, means that the exchange rate of the country is lowered down. This has both pros as well as cons attached to it. A weaker dollar would mean easier investment by foreigners into the country in terms of tourism, healthcare and education requirements as they would now, not have to spend as much money as they earlier used to.

Further, foreign consumers would end up paying lesser than they used to earlier for the goods, and this would help with production in terms of the increase in exports.

On the contrary, for anyone who was importing from other countries, they would now have to pay extra dollars than they earlier used to procure the good or service which they earlier could do with much lesser money.

We can thus, conclude by saying that a lower value US dollar has both pros and cons. On one hand, the demand for goods and services sold in the United States extends, and on the other exports become expensive. The key is to finding an optimum balance between the two for the economy.

Reasons why Trade Deficit is slow: -

The ideal situation for the administration would be to lower its trade deficit during a time period when their currency is devalued. A trade deficit takes place for any economy, when the overall expenditure incurred internationally exceeds the receipts from abroad.

The United States government is a tactical investor, and over the years has invested heavily in Asian countries as well as strengthened its army hold in countries struck with turmoil. This increases their costs which are mostly covered with debt financing and through raising dollars.

Even though, due to these moves, Trade Deficit is high and the exchange rate lower, they would still not lower down the deficit primarily because of the strategic nature of their expenditure.

It is common to see these things taking place in the economy, as even though economics would suggest us to reduce trade deficit during a decline in currency value, yet strategic interests promote spending more to maintain relationships or for any other economic or social or political consideration.

Please feel free to ask your doubts in the comments section if any.