International Finance
Question 1
a. The dollar is presently weak and is expected to strengthen over time. These expectations affect the tendency of U.S investors to invest in foreign securities because the value of U.S dollar decrease will lead to the U.S company get less profit and earn less money. Consequently, U.S companies will pay fewer dividends for investors who invest in these companies. So, investors will tend to invest in foreign securities where they can get higher dividend. On the other hand, a weak currency can reduce unemployment but maybe it can lead to high inflation, and simultaneously it may reduce U.S imports and boost U.S exports or buy more goods than it sells abroad (imports exceed exports). Another thing, in the long run, trade deficits may be expected to contribute to a weaker dollar, as the economy adjusts to create the surpluses needed to repay foreign investors. However, in the short run, the relationship between the trade deficit and the dollar is weak, and the value of the dollar is determined largely by investor preferences for U.S. dollar assets.
On the other hand, when U.S dollar is strong again, it will make the value of U.S dollar increase. A strong dollar will make exports more expensive to foreign consumers and also make imports cheaper. Hence, it encourages imports and reduces exports, and maybe increasing the balance of trade deficit. However, when the U.S dollar has stronger than other dollars such Singapore dollar, Yen, Euro or Canadian dollar, the value of the U.S dollar is a dependant variable by which it is determined by supply and demand. The consumptions will reduce and exports are the same, and against imports will increase. So it will make to enlarge the U.S balance of trade deficit. For instant, in 2006, U.S exports to China were about $55 billion, but imports from China were about $255 billion, which result in a balance of trade deficit of $200 billion with China (Jeff Madura, 2008, p.26). b. A current account deficit in the U.S
a. The dollar is presently weak and is expected to strengthen over time. These expectations affect the tendency of U.S investors to invest in foreign securities because the value of U.S dollar decrease will lead to the U.S company get less profit and earn less money. Consequently, U.S companies will pay fewer dividends for investors who invest in these companies. So, investors will tend to invest in foreign securities where they can get higher dividend. On the other hand, a weak currency can reduce unemployment but maybe it can lead to high inflation, and simultaneously it may reduce U.S imports and boost U.S exports or buy more goods than it sells abroad (imports exceed exports). Another thing, in the long run, trade deficits may be expected to contribute to a weaker dollar, as the economy adjusts to create the surpluses needed to repay foreign investors. However, in the short run, the relationship between the trade deficit and the dollar is weak, and the value of the dollar is determined largely by investor preferences for U.S. dollar assets.
On the other hand, when U.S dollar is strong again, it will make the value of U.S dollar increase. A strong dollar will make exports more expensive to foreign consumers and also make imports cheaper. Hence, it encourages imports and reduces exports, and maybe increasing the balance of trade deficit. However, when the U.S dollar has stronger than other dollars such Singapore dollar, Yen, Euro or Canadian dollar, the value of the U.S dollar is a dependant variable by which it is determined by supply and demand. The consumptions will reduce and exports are the same, and against imports will increase. So it will make to enlarge the U.S balance of trade deficit. For instant, in 2006, U.S exports to China were about $55 billion, but imports from China were about $255 billion, which result in a balance of trade deficit of $200 billion with China (Jeff Madura, 2008, p.26). b. A current account deficit in the U.S