High Dollar, Low Dollar—Which Is Better?

In the 1950s, it took 4.2 German marks to equal a dollar. At that same time, a dollar was worth more than 350 Japanese yen. At this writing, a dollar is worth about 79 yen, and the German mark was replaced years ago by the European Union’s euro. One dollar is equivalent to about 0.77 euros. These figures reflect radical change. There are both benefits and negative consequences of this change.

Consider the negative side of a declining dollar abroad. Because of the shrinking international value of the dollar, American purchases of goods and services abroad are made more difficult. For example, an American firm buying wool sweaters from a foreign firm for resale in the

United States

will experience a significant rise in the cost of acquiring the sweaters. In addition, American tourists will find that everything in a foreign country will cost more than it did in the earlier days of the strong dollar.

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There are positive aspects to a falling dollar. Although it makes it more difficult for Americans to purchase foreign goods, at the same time, the declining dollar makes it easier for foreign firms or citizens to make purchases in the

United States

. The increase in more foreign purchases of American products (increased exports) helps American business. If a low dollar persists over a long period of time, increased purchases by other countries and decreased buying of foreign products by Americans will eventually help the trade balance. Improving the trade balance means helping to reduce the

United States

’ balance of payments deficit.

Today’s business firms must be competitive in the global economy. What is positive for one nation may be negative for another. Thus, one nation’s exchange rate in relation to the value of another nation’s currency continues to be a matter of debate. As arguments can be made for both the strong dollar and the weak dollar, most trade negotiators will probably seek a middle-of-the-road position.

Discussion Questions:

  • What are the effects of a strong dollar for the United States?
  • What are the effects of a relatively weak dollar for the United States?

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