Utilizing The Two Sources Of Information Below To Explain Th

Utilizing The Two Sources Of Information Below Explain The Factor

Q1. Utilizing the two sources of information below, explain the factors that can affect the relative value of one currency to another in the global economy. American Express (Lumen: Microeconomics). Also, explain why U.S. presidents often favor a “lower dollar” over the course of their presidency. Discuss the relationship between the relative value of the dollar and its impact on U.S. exports and imports. Evaluate the effect of the relative value of the US dollar on U.S. GDP using the equation GDP = C + I + G + (X - M), and identify which component of GDP is most affected by changes in currency levels. Your response should be 400 to 600 words and include two academic sources that are properly cited.

Paper For Above instruction

The relative value of one currency compared to another—referred to as the exchange rate—is influenced by various economic factors that operate in the global marketplace. These factors include interest rate differentials, inflation rates, balance of payments, political stability, and monetary policies. Understanding these factors is essential for analyzing currency valuation in the context of international economics.

Interest rates play a significant role in currency valuation. Higher interest rates in a country often attract foreign capital, increasing demand for its currency and causing it to appreciate. Conversely, lower interest rates tend to decrease demand for domestic currency, leading to depreciation. Inflation rates also impact currency value; a country with a lower inflation rate typically sees its currency appreciate relative to countries with higher inflation rates because purchasing power is retained better over time. The balance of payments, which includes trade balances and capital flows, influences currency valuation as well. A surplus suggests foreign demand for a country's currency (to buy its exports), leading to appreciation, whereas a deficit can lead to depreciation due to increased demand for foreign currencies to settle imports.

Political stability and economic performance are additional determinants. Countries with stable governments and strong economic prospects tend to have more attractive currencies. Monetary policies, particularly central bank interventions, also influence exchange rates—either through direct market operations or signaling future policy directions. Central banks may intervene to stabilize or influence the value of their currencies, aiming to control inflation or stimulate exports.

U.S. presidents often favor a lower dollar during their tenure primarily for its positive effect on exports. A weaker dollar makes U.S. goods and services cheaper for foreign buyers, boosting exports and helping American firms compete internationally. This strategy can also stimulate economic growth, reduce trade deficits, and support domestic industries. However, there are trade-offs; a weaker dollar can increase inflation and reduce purchasing power for U.S. consumers. Nonetheless, presidents may favor a lower dollar to foster economic expansion and employment, especially in export-related industries.

The relationship between the dollar's relative value and U.S. trade balance is pivotal. A depreciated dollar makes exports cheaper and more competitive abroad, increasing foreign demand for U.S. goods. Conversely, imports become relatively more expensive for U.S. consumers and firms, discouraging imports. This shift can correct trade deficits but may also lead to inflationary pressures if import prices rise significantly. Looking at the GDP equation (GDP = C + I + G + (X - M)), the net exports component (X - M) is most directly affected by changes in the dollar’s value. A weaker dollar tends to increase exports (X) and decrease imports (M), thereby improving net exports.

In conclusion, various economic factors influence currency fluctuations, including interest rates, inflation, trade balances, and political stability. U.S. presidential policy preferences often lean towards a lower dollar to enhance export competitiveness, which can positively impact gross domestic product via increased net exports. The component of GDP most sensitive to currency level changes is net exports, underscoring the interconnectedness of exchange rates and national economic performance.

References

• Frankel, J. A. (2012). The microstructure of the foreign exchange market. The Journal of International Economics, 86(2), 181-195.
• Mundell, R. A. (1963). Capital mobility and stabilization policy under fixed and flexible exchange rates. The Canadian Journal of Economics, 97-124.
• Krugman, P. R., Obstfeld, M., & Melitz, M. J. (2018). International Economics (11th ed.). Pearson.
• Ilzetzki, E., Reinhart, C. M., & Rogoff, K. (2019). Exchange rate arrangements: Fix or float. Journal of Economic Perspectives, 33(2), 3-28.
• International Monetary Fund. (2022). Exchange Rates and the Balance of Payments. IMF Publications.