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macroeconomics question

 
 
Reply Sat 7 Apr, 2012 09:51 am
In a book I'm reading it says
"An increase in US imports will tend to cause the dollar to depreciate because the world supply of dollars will rise"
Is this statement true?
If it is, why?

(Also I feel ambiguous about the term "US imports". I don't know whether it's talking about imports from the US or to the US. So I originally assumed the dollar would appreciate because the international market wanted US imports)
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Thomas
 
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Reply Sat 7 Apr, 2012 10:14 am
@asianfail,
By definition, "US imports" means that goods and services enter the US and that US Dollars leave it in return. For the rest of the world, then, each import transaction by the US increases the supply of dollars, because that's what the US paid it. The transaction doesn't, however, affect the supply of the rest of the world's currency. Therefore, the increased supply of dollars on the rest of the world's market for currency will push down the rate at which the US dollar exchanges for the rest of the world's currencies. So yes, the statement you quote is true.

PS: The outcome is the same if you look at it from the US's perspective, or if the US pays for the transaction in foreign currency. The only important thing in analysing the transaction is to pick one perspective and one currency at the beginning, and then stick with them throughout the entire analysis.
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Ragman
 
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Reply Sat 7 Apr, 2012 02:37 pm
@asianfail,
The phrase US imports implies imports into USA. Otherwise it would refer to the commerce as exports OUT of USA. Any imported commercial trade means with relationship into that referenced nation.
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anneyours224
 
  1  
Reply Wed 10 Oct, 2012 11:17 pm
I totally agree with what Thomas has answered, because here in our country the U.S. dollar is already depreciating.
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