Question

Most people do want a strong domestic currency, especially if you are going overseas or if you buy foreign made products. However, what if you are an exporter? Will a weaker US dollar do any good to our economy? Have you heard of the J-Curve? Why our government right now is not trying to help the US dollar to appreciate?

Answer 1

Answer:

Strong domestic currency means cheaper foreign made product in domestic currency. Hence, people want to have strong domestic currency. Another reason is related to the reputation of the currency that people have with strong domestic currency. However, an exporter wants the opposite i.e. a weaker currency because the product to be exported will become cheaper in the international market and demand will increase and hence the export and ultimately the trade situation will improve in favour of domestic country.

J-curve shows the time path of trade flows. According to this curve, in the very short run, a depreciation of currency will cause the import price to increase and hence trade situation will worsen. However, in the long run, the economy will adjust as per the elasticity of import and export will rise thus improving the trade situation. For example, depreciation of dollar in 1985 caused rapid increase in import expenditure and in turn raising trade deficit. However, export increased dramatically from 1988 onward and trade deficit started declining.

The government right now is not trying to help the US dollar to appreciate because it wants to improve the trade deficit by increasing export and improving employment situations.