The Dollar has become the international standard after the Bretton Woods gold system discontinued .Today, almost all the countries carry out international trade based on dollars only. Economists value foreign exchange reserves in most of the countries in dollar terms. So, there are fluctuations in demand and supply of dollars in the international market. These fluctuations determine the dollar price.Rise and fall in dollar prices have both costs and benefits.But these depend on the nature of the economy. These fluctuations affect different industries in different ways. These effects reflect the nature of the economy. Understanding this phenomenon is critical for all students majoring in Economics. This article has been prepared for students who need help with economics assignment based on this trending economics case study.
Now, these fluctuations also affect the general price level.It means that the fluctuations can cause inflationary or deflationary pressures. But to cause that pressure, several other factors also come into the picture. The nature of the economy of a country determines those factors.
Today we will discuss about the costs and benefits of falling dollar price. This incident can have various effects. These effects can be opposite to each other depending on the context.Cost to one context can be the benefits of another.
Now, these fluctuations also affect the general price level.It means that the fluctuations can cause inflationary or deflationary pressures. But to cause that pressure, several other factors also come into the picture. The nature of the economy of a country determines those factors.
Today we will discuss about the costs and benefits of falling dollar price. This incident can have various effects. These effects can be opposite to each other depending on the context.Cost to one context can be the benefits of another.
BENEFITS OF FALLING DOLLAR
A country can reap the benefit of falling dollar price depending on the economy.There can be two possible conditions. We will discuss both of those conditions.
CURRENCY VALUE LESS THAN DOLLAR
For emerging countries,the value of anycurrencyis less than a dollar. For example, take the case of India.Let us assume that the dollar price in India is Rs. 67.India is a service-oriented economy.Because of this dollar price, exports are cheaper and imports are costlier. Service exports constitute a major percentage of India’s national income.Suppose, dollar price in India falls down to Rs. 65. This will have several impacts on the industrial sector.
• Manufacturing industry will get a boost.This industry is import-driven. Falling dollar price will make the imports cheaper.This aspect will help this industry in two ways. First, manufacturing firms will be able to import latest technologies at a cheaper rate.Second, they will be able to reduce production cost.These two factors will make the products more competitive in the global market.Advanced technological products will be available at a cheaper rate in the global market.
• Country will be able to control trade deficit. It is the difference between import and export. It total value of import exceeds total value of export, deficit arises.If the dollar value falls, then trade deficit will improve by default.The reason is that the deficit value will translate into domestic currency.
CURRENCY VALUE HIGHER THAN DOLLAR
For this case, take an example of the European Nations. Let us assume that the price of Euro is $1.11. Suppose, dollar price falls down and the price of Euro becomes $1.20. This will have several impacts on the industrial sector.
• Import sector will get a boost. Due to falling dollar price, any import will cost less Euro. This will in turn help the manufacturing sector to grow. At the same time, project outsourcing to the developing countries will also be cheaper.
• Value of foreign currency reserve will rise because of stronger Euro.The probability of more circulation of Euro in the international market will also rise.
COSTS OF FALLING DOLLAR
A country may face troubles of falling dollar price depending on the economy. There can be two possible conditions. We will discuss both of those conditions.
CURRENCY VALUE LESS THAN DOLLAR
We will continue with the previous example.In this section, we will consider the case of India.Here we will discuss about the negative impacts of falling dollar price.
• Service industry will face severe problems. The foundation of the Indian service sector is the information technology sector. Most of the projects in this sector come from foreign clients. A falling dollar price will reduce the revenue. There are instances, when the falling dollar price caused massive layoffs in this sector. For example, during the 2008 financial crisis, India experienced layoffs in the IT sector. Similar kind of layoff scenario was in the airline industry as well. In any emerging and service-oriented economy, this situation will arise.
• Value of export will not rise without reducing costs and profit margins.
CURRENCY VALUE HIGHER THAN DOLLAR
We will continue with the previous example of the European Nations. Here we will discuss about the negative impacts of falling dollar price.
• The countries will be facing inflationary pressure, as the price level will rise.
• Exporting the products will be critical. The price of Euro will rise with reference to dollar. So, export will be costly for the importing nations.
A country can reap the benefit of falling dollar price depending on the economy.There can be two possible conditions. We will discuss both of those conditions.
CURRENCY VALUE LESS THAN DOLLAR
For emerging countries,the value of anycurrencyis less than a dollar. For example, take the case of India.Let us assume that the dollar price in India is Rs. 67.India is a service-oriented economy.Because of this dollar price, exports are cheaper and imports are costlier. Service exports constitute a major percentage of India’s national income.Suppose, dollar price in India falls down to Rs. 65. This will have several impacts on the industrial sector.
• Manufacturing industry will get a boost.This industry is import-driven. Falling dollar price will make the imports cheaper.This aspect will help this industry in two ways. First, manufacturing firms will be able to import latest technologies at a cheaper rate.Second, they will be able to reduce production cost.These two factors will make the products more competitive in the global market.Advanced technological products will be available at a cheaper rate in the global market.
• Country will be able to control trade deficit. It is the difference between import and export. It total value of import exceeds total value of export, deficit arises.If the dollar value falls, then trade deficit will improve by default.The reason is that the deficit value will translate into domestic currency.
CURRENCY VALUE HIGHER THAN DOLLAR
For this case, take an example of the European Nations. Let us assume that the price of Euro is $1.11. Suppose, dollar price falls down and the price of Euro becomes $1.20. This will have several impacts on the industrial sector.
• Import sector will get a boost. Due to falling dollar price, any import will cost less Euro. This will in turn help the manufacturing sector to grow. At the same time, project outsourcing to the developing countries will also be cheaper.
• Value of foreign currency reserve will rise because of stronger Euro.The probability of more circulation of Euro in the international market will also rise.
COSTS OF FALLING DOLLAR
A country may face troubles of falling dollar price depending on the economy. There can be two possible conditions. We will discuss both of those conditions.
CURRENCY VALUE LESS THAN DOLLAR
We will continue with the previous example.In this section, we will consider the case of India.Here we will discuss about the negative impacts of falling dollar price.
• Service industry will face severe problems. The foundation of the Indian service sector is the information technology sector. Most of the projects in this sector come from foreign clients. A falling dollar price will reduce the revenue. There are instances, when the falling dollar price caused massive layoffs in this sector. For example, during the 2008 financial crisis, India experienced layoffs in the IT sector. Similar kind of layoff scenario was in the airline industry as well. In any emerging and service-oriented economy, this situation will arise.
• Value of export will not rise without reducing costs and profit margins.
CURRENCY VALUE HIGHER THAN DOLLAR
We will continue with the previous example of the European Nations. Here we will discuss about the negative impacts of falling dollar price.
• The countries will be facing inflationary pressure, as the price level will rise.
• Exporting the products will be critical. The price of Euro will rise with reference to dollar. So, export will be costly for the importing nations.
SUMMARY
So far, we have discussed the costs and benefits of falling dollar price. Through our discussion, following points emerge:
• Export oriented economies will face trouble.
• Production sector will rise because of cheaper imports.
• Cost-cutting will be a necessary strategy to make exports competitive.
So far, we have discussed the costs and benefits of falling dollar price. Through our discussion, following points emerge:
• Export oriented economies will face trouble.
• Production sector will rise because of cheaper imports.
• Cost-cutting will be a necessary strategy to make exports competitive.
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