The United States has not always been an advocate of free trade. At times throughout history, the country has had a strong impulse toward economic protectionism by using tariffs to limit imports of foreign goods in order to protect American industry. A big factor leading to the U.S. trade deficit was a sharp rise in the value of the dollar in the early to mid 1980's. This made U.S. exports more expensive and foreign imports into the United States cheaper. The dollar appreciated because of the recovery from the global recession of 1981-82, and in huge U.S. federal budget deficits which created a significant demand in the United States for foreign capital.
In the past, when the economy was majorly dependent on its exports, a cheap yen would have made Japanese goods and services very competitive, resulting in the increase in e... ... middle of paper ... ...emand. The increase in the consumption tax would subsequently result in the left shift of aggregate supply from SRAS1 to SRAS2. These taxation increases the costs of production for the firms. Figure 2 shows the market of Japan after the policies concerning the economy are implemented. The currency exchange rates have fluctuated wildly, yet the Japanese economy has long dogged the danger of an economic crisis due to the excessive cost of the yen against other major currencies in the world.
(The Economist, 2005). This is partly due to the fact that a number of central banks make their decisions based on the actions of other central banks such as the Federal Reserve in the US (Rogoff, 2006). An example of this would be with number of Asian and oil producing countries will stabilize their currencies against the US dollar, which implies that the policies enacted by the Fed can still have an impact on global interest rates. (Fisher, 2006) Suggests that central banks should be conditioned on changes in foreign potential output and questions why, for instance, the output gap is calculated without taking into account the Chinese and Indian economies.
Some economists go with the thought that the massive depreciation of the dollar will lead to correct the situation of the deficit. When the foreign capital investors refuse to finance the United States deficits and switch to invest their money in other places that will lead to a financial crisis in the United States. The deficit of the current account gets a considerable attention, because it affects directly in the capital market, particularly the dollar exchange rate. The dollar is influenced greatly by the change of the current account deficit, because the trade deficit means that the United States imports of goods and services exceeds its exports. Thus, the import surplus increases demand of foreign currencies the demand of the dollar drops and cause dollar devaluation.
Interest rates, inflation, and exchange rates are highly correlated; interest rates have been used by Central banks to exert influence over exchange rate and inflation as a fiscal policy, high interest rates attract foreign capital and tries to rise the exchange rate, on the other hand this impact could be mitigated by the high inflation differential between countries (Bergen, 2010, para. 5). As a general rule, A fall in the interest rate will lead to a fall in the value of the currency against other currencies, if Country A interest rate declines, then more investors in that country will withdraw their money from the banks in order to invest them in the U.S., therefore, the funds transferred to the U.S. would pressure Country A’s currency to lose value (Aashwin, 2005). Moreover, Country A interest decrease will encourage the demand of U.S. currency while the supply of Country A’s currency will rise, thus, Country A’s currency will depreciate or worth less in terms of the U.S. dollar. Similarly, Country A’s investor might find viable to exchange Country A’s currency for Country’s B currency as a bridge to finally make a conversion to U.S. dollars.
By buying bonds from the open market, the Federal Reserve increases the reserves of commercial banks which in turn will increase the overall money supply in the country. The opposite is true if the Fed sells bonds on the open market. By doing so, the Fed reduces the reserves of banks and, in turn, takes money out of the system. By being able to control how much money the commercial banks can lend, the Fed has a very powerful tool to adjust the economy. The second tool the Federal Reserve uses is the adjustment of the reserve ratio.
The implication of such a scenario on the local industries is that their downfall is inevitable. Similarly, local goods will increasingly become difficult to market at least on grounds of prices (Zhang). Market liberalization is such that there is an increase in demand for items, whose price levels are lower irrespective of the country of origin, when all the other factors are held constant. When the value of the US dollar changes in vale, the sectors affected are those that take place in international trading activities because they are the ones who pay or receive payment in the currency form of the United States. It is for market liberalization that all interested parties can trade in the US dollar, alongside all of the other world’s currencies, by interactions of the market forces of demand, and supply, without necessarily the need for any interventions by the government
Purchasing these instruments works to push the interest rates large banks pay the Fed down to nearly zero in order to loosen up credit (currently 0.25%), as well as push down yield rates on US treasury bonds in order to keep the interest on the US National debt feasible. Since the housing collapse of 2008 (otherwise known as the ‘Great Recession’) the Fed has been purchasing up these toxic mortgage backed securities and... ... middle of paper ... ... strength of imaginary wealth, the government bubble (mortgages and bonds) is propping us up now. The pressure within the bubble will grow so great that the Fed will soon only have two options – 1. Finally contract the money supply and let interest rates spike -- which will cause immensely more pain than if we let this happen in 2002 or 2008, or 2. Keep pumping more dollars into the economy, causing hyperinflation and all the evils that come with it.
David P.（1971）in international business we can compare different commodities prices in different countries, because exchange rate play an important role in economic development. Jorian(2008) Over the last decade, the world's exchange rate regimes has been hollowing, the result is to abandon the soft exchange rate peg, but the fixed rate of exchange and the floating exchange rate influence rises sharply. In open economy, exchange rate is a very important economic variable and exchange rate fluctuation means that it has the broad influence to the economic field. Mess and Rogodd (1984)in their recent find when the exchange rate changes, it will directly influences the i... ... middle of paper ... ...his country, like share, bound and so on. It will increase the demand for this country currency.
This paper will analyze the current position of the trade deficit and some of the factors that have caused the gap to expand. Trade Gap Defies Expectations Introduction Most economist view trade as an integral part of the free market system. “Trade allows specialization and division of labor and thereby promotes technological growth” (Colander, 2004, p. 414). The United States economy is currently running a trade deficit, an excess of imports over exports. This shortage is currently being financed by the selling of assets such as stocks, bonds, and real estate.