South-Western College Publishing - Economics  
Globe Trotting for the Dollar
Topic International Trade
Key Words Exchange Rates, Appreciation, and Depreciation
Full Article

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Reference ID: A155327950

News Story An American delegation led by Treasury Secretary Henry M. Paulson will head to China in December 2006 to engage China on several economic issues, but particularly to encourage the Chinese government to let its currency, the yean, rise in value against the dollar. If successful the current trade deficit with China, which soared past $200 billion last year, could be narrowed.

Economists explain that if the dollar does depreciate against the yuan it will probably encourage similar changes in other Asian and European currencies. As the Bush administration pursues this notion of a weaker dollar it hopes to make American exports to other countries less expensive and American imports from other countries more expensive, helping to spur an industrial revival at home.

"Paulson has got to like a euro that's appreciating in value," said C. Fred Bergsten, director of the Peterson Institute of International Economics. "He came into office facing an overall American trade deficit that is close to $1 trillion a year. He's got to welcome something that shows the trade deficit likely to go down."

There are positives as well as negatives to a successful depreciation of the dollar. Europeans and Asians will likely step up to the plate and buy more American goods as they become less expensive. At the same time it will become more expensive for Americans to travel abroad either as tourists or on business and imports will be more expensive.

The Bush administration believes the positives will outweigh the negatives. Mr. Paulson's trip is organized around the principle that China needs to let the yuan rise in value against the dollar because China's current path of binging on exports will result in an overheated Chinese economy - it's growing at around 10 percent a year - and it will collapse if not cooled off slowly.

To show the importance of the China trip Paulson's expedition will include five cabinet members and Ben S. Bernanke, the Federal Reserve chairman.

Discussion Questions:
1. Explain how a weaker dollar can "spur an economic revival at home."
2. Visit the website at and view the graph on that page. Describe the relationship between the Chinese yuan and the U.S. dollar since 1980 and indicate the current exchange rate.
Multiple Choice/True False Questions:
1. When a country's currency depreciates, imports from other countries become more expensive.
  1. True
  2. False
2. A trade deficit means that a country's exports are greater than its imports.
  1. True
  2. False
Source Steven R. Weisman, "Volatile Dollar May Not Be Scary to Washington", The New York Times Online, December 2, 2006.
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