Is the Dollar Depreciation Good for the American Economy? Essay

Currency depreciation always affects both sides of the coin. By lowering the dollar, it will enhance the price competitiveness of US product overseas but lower dollar maybe counter productive especially if there is not enough output for further expansion. Thus the move to depreciate or to appreciate the currency is very significant for economy not only to the US but in the global economy as well. Maintaining the dollar at its value therefore is also very important as it provides balance on imports and export commodities. Over the years the dollar has been swinging high and low against some of the worlds leading currencies. The question that might be ask is, was it intentionally depreciated as part of economic strategy or was it a result of economic decline due to domestic or international circumstances that hamper economic growth, such as, the 9/11 tragedy and the US led war and continues occupation in Iraq? In the midst of ever-increasing competitiveness in the world market, dollar depreciation is good for America because it puts them in the economic competitive advantage position in the international market relying on the quality of the US made goods. It is often a deliberate economic action to cope with the stiff international market competition. However, there is a contraindication to this economic action as lowering the dollar would mean lowering the living standard back home. Depreciating the dollar could stimulate strong economic performance but it also poses bad impact because it will be at the expense of cutting American wages. Paul R. Krugman point out â€Å"Depreciating the dollar is a bad way to reduce the trade deficit because it amount to meeting international competition by cutting American wages, thus lowering the living standards of the American workers† (119) In view of the macroeconomic principles, it will be more advantage for the U. S. to depreciate the dollar at a certain level because it will help to settle some of its economic deficits such as unemployment problem and trade deficit. What the US needs to do is expand its market abroad while increasing domestic productions of export goods. If there is enough output for export expansion, the impact of lower dollars maybe minimal as more money will circulate in the market. Japan’s yen is certainly undervalued compared to the dollar and yet the Japanese enjoy a high standard of living comparable to that of the United States. By mass production it will create more jobs, which can ease the problem of unemployment Another thing the U. S. should do is to put a substantive limit on domestic product for domestic consumption in order to maintain the inflation rate at its current level. Because of the lower dollar, imports from other countries will be balanced by the US exports thereby wiping trade imbalances because of the higher dollar. Thus lowering the dollar provides ample economic benefit for America. It maybe a bitter pill to swallow for others but it may cure some of the economy’s diseases. But it cannot be denied that depreciating the dollars have a serious economic implications to some developing countries. As a matter of principle the US should not play the role of a shrewd manager who only cares of its interest at the expense of the weaker countries. Jacob Frenkel Noted â€Å"The U. S. decision on an exchange-rate regime will clearly affect foreign economies, and it is not clear that what is best for America will be best for the rest of the economy, we must reformulate our notion of how a good exchange rate system performs† (158). Frenkel cited that due to dollar depreciation, the corresponding appreciation of foreign currencies against the dollar worsens the situation abroad compared to the fix exchange rate case. Frenkel stated, â€Å"By allowing the U. S. to export some of its unemployment, the dollar’s depreciation has a beggar-thy neighbor effect† (158). Thus, while the dollar depreciation might shield the U. S. economy from the adverse effect of inflation, but it has an opposite effect on U. S. trading collaborates. To explain this further Frenkel said,â€Å"The beggar thy-neighbor effect of dollar depreciation can be thought of as a payment made by the foreign country to the United States in states of the world where U. S. aggregate demand is relatively low. In the opposite situation, the United States, by allowing its currency to appreciate, compensates foreign countries† (Frenkel, 158). Thus the depreciation of the U. S. dollar requires a more sensitive study of the possible implication on other countries particularly on the trading partners of the U. S. if the United States is concern of its trading partners’ economic developments. Not only in the international market that the dollar depreciation had its impact but in domestic economy as well. Allen J. Lenz pointed out that â€Å"contractionary policies could slow U. S. economic growth relative to foreign growth rates† (68). Lenz emphasized that what counts is not just good trade performance but how that performance is achieved. Strong U. S. market performance based on productivity gains contributes to gains in living standards. Strong performance achieved by dollar depreciation can lower living standards. The depreciation therefore is an important economic action of the United States that will have significant impact not only in the U. S. but also to its trading partners. It may be good for the U. S. economy, and bad for the trading partners, but it may also be bad for the U. S. Work Cited icago PressFrenkel, Jacob. Exchange Rate and International Macroeconomics. U. S. A. : University of Chicago. 1988. Krugman, Paul. Diminished Expectations U. S. A. : The Washington Post Company 1994. Lenz, Allen J. Narrowing the U. S. Current Account Deficit: A Sectoral Assessment. U. S. A. : Institute for International Economic. 1992.