South-Western College Publishing - Economics  
Exports to Europe
Subject Aggregate Expenditure and Demand-Side Equilibrium
Topic International Trade
Key Words Economic Growth, Depreciation, Gross Domestic Product
News Story

U.S. exports have been hit hard by Asia's financial crisis and by the devaluations in Russia and Brazil. Exports to Europe have remained strong, supporting profits for U.S. companies. There are, however, clouds on the horizon. Economic indicators for Germany, Italy, France and the United Kingdom all point to a slowing or economic downturn that could threaten U.S. exports to these countries.

Economic growth in Europe is slowing. The European Monetary Union which represents 11 European countries, reported fourth-quarter growth in Gross Domestic Product (GDP) of only 0.2%. For the first time in 3 years, Germany's GDP actually fell by 0.4%. When economies weaken, imports also decrease and the fear is that the slowdown in Europe will cause a fall in demand for exports in the U.S.

The euro, Europe's new currency, has fallen by about 8% against the dollar since its introduction a few months ago. This depreciation of the euro makes European goods cheaper and American goods relatively more expensive. Although the euro's decline might benefit American consumers, it would hurt U.S. firms. The combination of Europe's weakening currency and economies could be a drag on the U.S. economy.

Some economists are more sanguine about Europe's prospects and the further weakening of U.S. manufacturing. While the manufacturing sector in Europe is weakening, as it is in the U.S., the household sector is still strong and exports to Europe have not declined. Asia's economic condition seems to be turning around and Asia's recovery might balance the slowdown in Europe.

(Updated April 1, 1999)

1. What are some of the factors that determine the quantity of U.S. exports?
2. What are the consequences of an appreciation of the U.S. dollar vis--vis other currencies on the quantity of U.S. exports? On the Gross Domestic Product (GDP) of the U.S.?
3. What determines the relationship between a change in U.S. exports and the magnitude of the change in U.S. GDP?
Source Darren McDermott, "Weak Growth in Europe Threatens U.S. Exports", The Wall Street Journal, March 11, 1999.

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