Relationship between falling dollar and rising exports in American companies

Falling Dollar

Explain the relationship between the falling dollar and rising exports. What does this relationship mean for American companies?

During the first years of the 21st century, the value of the American dollar relative to foreign currencies hit record lows. This made it much more expensive for Americans to travel abroad, given their devalued currency. Americans stayed home, Europeans flocked to tour New York City. ABC reported in 20007: "record numbers of Europeans are flocking to New York this fall -- prime holiday shopping season -- as the dollar sinks to new lows against the euro and British pound" (De Lollis 2007). The lower value of the dollar was attractive not simply because of ticket and hotel prices, but also because of the attractiveness of shopping excursions for Europeans.

When the economy is in a state of distress, many nations will attempt to devalue their currency to attract tourists and investors alike. In fact, one of the problems the economically troubled nations of the EU are suffering is that they cannot devalue the euro single-handedly to attract tourists to bolster their national economies. When a local currency is devalued, businesses from abroad are more apt to open up operations within those nations. Labor and raw materials can be obtained at a bargain and the final product can be exported internationally. However, other companies may think twice about entering the U.S. market, because the weakened dollar means lower profits for them from U.S. consumers. "Though BMW and other automakers may accept lower profits to stay in the U.S. market, the lower dollar boosts prices for imported food, shoes, chemicals and the like. European governments worry that a dollar in free fall could be a disaster even for Germany, Europe's strongest economy" (Blaine 2007).

As the currency value drops, exporting becomes more attractive for U.S. firms. "A lower dollar increases the price competitiveness of U.S. exports. Cheaper exports will lead to an increase in demand. If demand is price elastic then there will be an increase in the value of exports" (Effects falling dollar, 2011, Economics Help). However, American consumers are often unhappy when the dollar is falling. "U.S. consumers will face increased prices of European -imported goods, so the growth in demand for imports will slow" (Effects falling dollar, 2011, Economics Help).

Unemployment could decrease domestically, given that U.S. consumers will favor buying domestic goods, rather than foreign-produced goods, driving up demand for U.S.-manufactured items. Also, a devalued currency means that foreign companies are likely to come into the nation to hire workers. Although U.S. citizens may chafe at the loss of their international buying power and prestige, during a recession, a devaluated currency can actually be a good thing in the short-term. "The United States is currently running an enormous trade deficit (importing more than it exports), which represents a significant drag on efforts to stimulate economic growth and create jobs. Given this, the benefits of greater international competitiveness spurred by the dollar decline greatly outweigh the costs" (Bivens 2007).