Falling exchange rates increase import prices, creating (1) A substitution effect that increases demand for domestic goods and (2) An income effect that reduces total real income, and therefore demand for, both domestic and foreign goods. Using 1960 - 2000 data U. S., this paper finds the income effect dominates, causing a net negative effect on the GDP. The 12.5 point (12 percent) fall in the exchange rate 2000-2007, is estimated to have caused a decline in economic growth of 0.75 percent per year, and a 1.5 percent drop in the and the trade deficit as a percent of GDP.
John J. Heim. "How Falling Exchange Rates Have Affected the U.S. Economy and Trade Deficit." Proceedings of the New York State Economics Association. vol. 1, October 2008, p. 44-53
BibTeX entry download