EECS 1530 Lecture Notes - Lecture 6: Eurozone, Floating Exchange Rate, United States Dollar
21 Jun 2018
School
Course
Professor
EECS 1530 Lecture 6 Notes
Introduction
How Exchange Rates May Correct a Balance-of-Trade Deficit
Its standard racket is priced at $140, and it competes with the Accel racket in both the
U.S. and the eurozone market.
When the euro was valued at $1.60, Eurozone consumers paid about 87 euros for
Malibu’s racket (computed as $140/$1.60 ¼ 87.50 euros).
Since this price to eurozone consumers was lower than the Accel’s price of 100 euros
per racket, Malibu sold 7,000 rackets in the eurozone at that time.
When the euro’s value falls to $1.20, however, eurozone consumers will have to pay
about 117 euros for Malibu’s standard tennis racket (i.e., $140/$1.20), which is more
than the 100 euros for an Accel racket.
Hence Malibu only sold 2,000 rackets to eurozone consumers in this month.
As those consumers reduced their demand for Malibu rackets, they increased their
demand for tennis rackets produced by Accel.
This example was based on only one product
The cumulative effect of all exports would again be much greater.
In general, the examples here suggest that, when currencies are strong against the U.S.
dollar (i.e., when the dollar is weak), U.S. exports should be relatively high and U.S.
imports should be relatively low.
Conversely, when currencies are weak against the U.S. dollar (i.e., when the dollar is
strong), U.S. exports should be relatively low and U.S. imports should be relatively high,
which would enlarge the U.S. balance-of-trade deficit.
A floating exchange rate could correct any international trade imbalances between two
countries in the following way.
A balance-of-trade deficit suggests that the country is spending more funds on foreign
products than it is receiving from exports to foreign countries.
Document Summary
How exchange rates may correct a balance-of-trade deficit. Its standard racket is priced at , and it competes with the accel racket in both the. When the euro was valued at . 60, eurozone consumers paid about 87 euros for. Malibu"s racket (computed as /. 60 87. 50 euros). In general, the examples here suggest that, when currencies are strong against the u. s. dollar (i. e. , when the dollar is weak), u. s. exports should be relatively high and u. s. imports should be relatively low. A balance-of-trade deficit suggests that the country is spending more funds on foreign products than it is receiving from exports to foreign countries. This exchange of its currency (to buy foreign goods) in greater volume than the foreign demand for its currency could place downward pressure on the value of that currency. The euro was valued at . 60, eurozone consumers paid about 87 euros for malibu"s racket (computed as /. 60 87. 50 euros).
