Question

In \(2017,\) an article in the Wall Street Journal discussing the latest data on U.S. net exports noted that, along with other currencies, "the [Chinese] yuan has risen this year against the dollar." The article also noted that there had been "stronger [economic] growth in Asia and Europe." a. What does the article mean by noting that the yuan had "risen" against the dollar? b. Briefly explain whether the combination of other currencies rising against the dollar and stronger economic growth in Asia and Europe had led to an increase or a decrease in U.S. net exports. c. Will the outcome you discuss in part (b) result in a movement along the U.S. aggregate demand curve or a shift of the curve? Briefly explain.

Short answer

a. The yuan rising against the dollar indicates that it became stronger or appreciated in comparison to the dollar, meaning it could buy more dollars than before. b. The combination of other currencies rising against the dollar and stronger economic growth in Asia and Europe would likely lead to an increase in U.S. net exports as U.S. goods become relatively cheaper. c. This would result in a rightward shift of the aggregate demand curve as the increase in net exports increases the aggregate demand.

Step-by-step solution

Interpret the rise of yuan against the dollar

The article implies that the value of yuan has appreciated against the dollar. Therefore, it takes fewer yuan to purchase a dollar. This means Chinese goods have become relatively more expensive for American consumers, which could decrease demand for these goods.

Effects on U.S. net exports

Net exports equal exports minus imports. If other currencies have appreciated against the dollar and there's stronger economic growth in Asia and Europe, it means goods and services from the U.S. have become relatively cheaper for foreign consumers. Therefore, U.S. exports could increase. Meanwhile, foreign goods have become more expensive for U.S. consumers, which means imports could decrease. Both of these contribute to an increase in U.S. net exports.

Effects on the U.S. aggregate demand curve

An increase in net exports would increase aggregate demand as net exports is a component of aggregate demand (AD = C + I + G + NX, where C=consumption, I=investment, G=government spending, NX=net exports). Therefore, the outcome discussed in part (b) would result in a shift of U.S. aggregate demand curve to the right.

Key concepts

Currency Appreciation

When we talk about currency appreciation, we refer to the increase in value of one currency relative to another. This concept is a crucial part of international finance and has far-reaching implications on international trade. If the currency of a country appreciates, it means that one unit of that currency can now buy more units of a foreign currency than before.

For example, if the Chinese yuan appreciates against the U.S. dollar, it will result in Chinese goods becoming more expensive for American consumers, and American goods becoming cheaper for Chinese consumers. This shift can reduce the demand for Chinese goods in the U.S. and increase the demand for U.S. goods in China. Currency appreciation affects a country's export and import levels and, therefore, its net exports. It's critical for students to understand that the relative costs of goods between countries can significantly change due to currency valuation shifts.

Aggregate Demand Curve

The aggregate demand curve illustrates the total quantity of goods and services that households, businesses, government, and foreign buyers will collectively purchase at each price level. It's an essential concept in macroeconomics, representing the demand for the country's gross domestic product (GDP).

The curve typically slopes downwards from left to right, indicating that lower price levels correspond to higher quantities of goods and services demanded. Changes in net exports, due to circumstances such as currency appreciation, can shift this curve. If net exports increase, this would translate into greater demand for the country's goods and services, shifting the aggregate demand curve to the right. On the other hand, a decrease in net exports would shift the curve to the left. Students should recognize that it's not just the price levels that influence this curve but also the external economic factors that can cause it to shift entirely.

International Trade

International trade is the engine of the global economy, enabling countries to buy and sell goods and services across borders. The balance of trade, part of a country's balance of payments, is measured by the difference between the value of its exports and imports, known as net exports.

Several factors can influence international trade, including currency appreciation or depreciation, trade policies, economic growth of trade partners, and shifts in global demand. An appreciation in a country's currency can make its exports more expensive and imports cheaper, potentially reducing net exports. Conversely, currency depreciation can have the opposite effect. Students should grasp the dynamics of how these conditions affect international trade, as it helps them to better understand current events and economic policies that impact their country's economy.

Economic Growth

Economic growth refers to an increase in the production of economic goods and services, compared from one period of time to another. It's typically measured by the rate of change in a country's gross domestic product (GDP). Economic growth is signified by an increase in a country's output and is considered a positive sign of a healthy economy.

Sustainable economic growth leads to higher employment and income levels, which can boost consumer spending and investment. Furthermore, when countries experience economic growth, they tend to import more due to higher consumer demand, which can impact the balance of trade and subsequently, net exports. However, if a country's trading partners are also growing economically, they might import more from that country, contributing to an increase in its exports. Students examining economic indicators should consider how growth rates can affect not just domestic prosperity but also international trade.