Proceedings of the New York State Economics Association


How Falling Exchange Rates Have Affected the U.S. Economy and Trade Deficit

John J. Heim

vol. 1, October 2008, p. 44-53


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.


suggested citation:

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

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