The United States’ macroeconomy both affects and is affected by international trade and exchange rates; exactly how this happens can be summed up to cause and effect. Every shift in trade policy or foreign relations causes a major movement on the global scale. According to the World Trade Organization, as of 2012 the United States is ranked highest in both imports and exports of commercial services and highest in merchandise imports, second highest in merchandise exports (World Trade Organization, 2014). Because the United States is such a major player in international trade it is essential for every citizen to understand how international trade and exchange rates operate.
To comprehend the finer points of international trade and finance we first need to look at the basics and that would be exchange rates. Exchange rates are the rate that one country’s currency can be traded for another. These rates are determined by the foreign exchange market or forex market and how the forex market decides what the exchange rates are is through supply and demand. As a supply of a country’s currency increases and demand drops the exchange rate will lower. As supply lessens and demand increases the exchange rate will raise. There are many factors that affect exchange rates such interest rates, trade policy, country’s income and domestic prices but all of those go back to supply and demand. For instance, if domestic prices are low then consumers will focus on buying domestic goods, decreasing the amount of imports, decreasing the need for foreign currencies and increasing the need for dollars because there would be less U.S. currency in the forex market leading to a higher exchange rate. Exchange rates are...
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McTeer, B. (2013). The Role of Foreign Trade on GDP. Retrieved from http://www.forbes.com/sites/bobmcteer/2013/05/05/the-role-of-foreign-trade-on-gdp/
Ro, S. (2013). In One Chart, Here is Why Detroit Failed. Retrieved from http://www.businessinsider.com/auto-sales-shrinking-component-of-gdp-2013-7
Scott, R., & Wething, H. (2013). Jobs in the U.S. auto parts industry are at risk due to subsidized and unfairly traded Chinese auto parts. Retrieved from http://www.epi.org/publication/bp336-us-china-auto-parts-industry/
Seigmand, J. (2008). Higher Education Shows a Big Trade Surplus for the United States. Retrieved from http://trade.gov/press/publications/newsletters/ita_0909/higher_0909.asp#continues
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