Chapter 20.2, Problem 5R

To determine

To evaluate: The advantage to the US when foreign countries purchase their currency.

Explanation of Solution

Advantages to the US when foreign countries buy their currency are:

1. Imports are cheaper: Products made abroad and imported into the U.S. will be lower in price if the value of the currency of the manufacturer falls in relation to the dollar. As the dollar begins to boost, prices on imports will start to fall. There will be fall in price for certain low-cost imports, having left more disposable revenue in the hands of the American consumers. U.S. firms importing raw resources from foreign countries will have reduced overall cost of production and thus enjoy higher profit margins.
2. Travelling abroad is cheaper: Americans having U.S. dollars have an advantage, offering greater level of overseas buying power. Since local prices in overseas nations are not greatly influenced by changes in the US economy, when transformed to local currency, a strong dollar can buy more goods.
3. Multinationals That Do Business in the U.S. Benefit: It will benefit foreign businesses that do a lot of business in the U.S. and its shareholders. Major companies that have a huge number of US sales and therefore earn revenue in dollars will see dollar gains translate into benefits on their financial statements. Investors in those firms should also be compensated.

Economics Concept Introduction

Introduction: The value of dollar becomes strong when it increases in value on the foreign-exchange market against other currencies. An improving U.S. dollar implies it can purchase more foreign currency than it used to..