Assignment:
1. Having a lower U.S price level means prices for the goods produced in the United States are lower relative to the prices in foreign countries. It is said that people will buy more products from the U.S and less foreign products known as the net export effect. Having a balance of payment is essential since it tells whether a country has enough finances to pay for consumption of imports and if the country is producing enough economic output to pay for its growth. During an economic expansion, "A country with a balance of payments surplus is probably exporting much of its production. In addition, its government and residents are savers, providing enough capital to finance this production and even lend to other countries. (About.com, 2014).
Economic variables change during an economic expansion with interest rates. If the value of the dollar compared to other currencies increases, goods exported from the U.S. will cost more in terms of foreign currencies than before, and imports will cost less than before. Therefore, net exports will tend to fall, depressing economic growth in the U.S. and stimulating growth overseas. (Economics USA, 2014)
The value of the dollar changes during net exports. When the dollar depreciates against major foreign currencies, one generally expects to see current-dollar exports increase, as U.S. produced goods become cheaper abroad. The effect on current-dollar imports is more ambiguous: Depreciation increases the dollar cost of a given volume of imports, but the volume may decline to the extent that domestic goods and services are substituted for imports in response to the increase in the relative cost of purchases from abroad. (Bureau of Economics)
Changes in exchange rates affect relative prices across countries. Having a fixed exchange rate imports become more expensive and the government can influence the price of its currency. A flexible exchange rate system exports become cheaper in other countries. This increases net exports and price inflation.
References
Amadeo,K. (2014) Balance of Payments.Retrieved from: https://useconomy.about.com/od/tradepolicy/tp/Balance-of-Payments.htm
Retrieved from: https://www.learner.org/series/econusa/unit28/
Retrieved from: https://www.bea.gov/faq/index.cfm?faq_id=498
Please reply to the discussion below in 100 words.
2. During an economic expansion the current account of the balance of payment is going to tend to begin showing a widening trade deficit should the demand of domestic products exceed the current supplies of those same products. This will cause consumers to shift more of their purchasing dollars to imported goods that are available in quantity - at least until domestic firms bring inventory levels into line with demand. However, should domestic products be available in sufficient supply and those same products are competitively priced throughout the expansion then the impact on the current account of the Balance of Payment may not be significantly impacted. Much of this is going to depend on the state of the economy prior to the expansionary period. If coming out of a major recession and producers have cut their inventory levels to a level unable to meet the sudden demand then the trade balance is going to shift towards and deepen a deficit balance.
Expansionary periods also have a tendency to see higher interest rates as governments raise the national interest rate in an effort to control the expansion and prevent undesirable inflationary trends. This can actually make such 'good' periods to actually be poor choices when making major purchases such as homes. With more people looking to purchase a home sellers are going to likely ask for more money as a result of the higher demand being exhibited in the market. Interest rates on mortgages are also likely going to rise as banks move to match the rising national interest rate.
The value of the dollar is also going to likely rise during such a period. This will be tied into the expected rise in the interest rate as investments using the dollar would be more attractive during such a period. This is going to create a larger demand for the supply of dollars on the market since all such investments are going to have to be made in dollars - not in Euros or other currency. However, if the economic policy for the government is fixed then the increase in the value of the dollar would likely be offset as the government makes more dollars available on the market in an effort to limit any increase in value.