The US Experience: An Interpretation
Abstract
Next we move to the relationships between the trade balance and the foreign exchange value of the dollar and terms of trade. The negative relationship is not anything new or an unexpected result in the context of the traditional view. Where we part company is with the interpretation. While it may be true that a “cheaper dollar” may improve the trade balance, that may not be a desirable outcome if all of the relationships identified in this section hold up. The “cheaper dollar” may be reflecting a deterioration of the terms of trade, in which case an improvement in the trade balance due to a weaker dollar may signal an economic slowdown, higher unemployment, a capital outflow, or a lower relative ...
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