Question

Assume the world only consists of the United States and Germany, and that trade between them is balanced such that neither runs a trade deficit nor surplus. If exchange rates now change such that the euro becomes more expensive for Americans to buy (and all else remains the same), determine the expected outcome.

U.S. exports to Germany will decrease.

Answer Bank:
not change.
surplus.
increase.

U.S. imports from Germany will increase.

deficit.
decrease.

Net exports (NX) in the United States will decrease.

The United States will begin to run a trade surplus.

The U.S. capital and financial account will not change.

Answer 1

1 U.S. exports to Germany will decrease.

2 U.S. imports from Germany will increase.

3. Net exports (NX) in the United States will decrease.

4. The United States will begin to run a trade deficit.

5. The U.S. capital and financial account will run a surplus.

When the euro (the currency used in Germany) became more costly for Americans to purchase, the exchange rate swung in favor of the euro.

1. As American goods become expensive for German customers, there will be decline in the American exports to Germany.

2. Because of relative decrease in price of German goods, there will be a rise in imports from Germany.

3. The US will experience decline in net exports (NX). This is because net exports will decline since imports will rise (b) and exports will decline (a).

4. A trade imbalance with the U.S. will emerge. When a nation's imports exceed its exports, there occurs a trade deficit. The United States will experience trade imbalance because exports decline and imports rise.

5. There will be surplus in US capital and financial account. The United States is importing more products and services than it is exporting when it has a trade imbalance.