We will write a custom Essay on The effects of U.S. dollar depreciation relative to yuan on the economies of the USA and China specifically for you
301 certified writers online
This paper will tend to analyze the impact the U.S. dollar depreciation has on both the Chinese and the U.S. economies. This depreciation could impact both negatively and positively on the U.S. economy, this may benefit the Chinese economy as the prices of the imports from China will drastically become higher while the value of its exports to China would increase. The paper therefore addresses both scenarios as bellow.
The effect of U.S. dollar depreciation relative to Chinese yuan
Devaluation can simply be defined as the decrease in the value of a country’s currency relative to that of a foreign country. The U.S. currency depreciation can be traced back to the period between 2002 and 2008.
This depreciation, however, has not been on a steady move, for example, in the years preceding the 2002-2008, the decline was so massive that it was felt greatly against the major currencies, among which are the euro, the Japanese yen, the Mexican peso, and the Chinese yuan (Elwell 1). Elwell argues that since the mid of the year 2009, the US dollar fell massively against the other major currencies recording a fall of about three percent against the yuan (1)
The effect of dollar depreciation on the U.S. economy
Depreciation of the U.S. dollar relative to the Chinese yuan will make the U.S. exports cheaper and imports more expensive; by doing so, the products in China will become more competitive against the third country’s products whose currency is pegged to the dollar (Fan 3). Fan points out that, ‘depreciation can also lead to improved economic growth by stimulating import’ which can also lead to an increase in the demand of import, and benefit the Chinese export’ (4).
It is therefore important to note that the dollar depreciation will cause the price of imports to increase in relation to the prices of exports that are traded between the USA and China, this will eventually have a negative effect on both the businesses and the consumers in the sense that their purchasing power will tend to decline (Elwell 10). The economic trend remained constant during the period of the recession (2008-2009), and therefore the demand for loans continued to be very low for the consumers and the businesses (13).
The effects of U.S. dollar depreciation on China economy
This simply means that the Chinese yuan has appreciated relative to the U.S. dollar, therefore the effects of this appreciation are expected to be negative across all sectors. However, the change in the price is slightly different between agricultural and non-agricultural sectors (Yang et al 5).
Yang et al in their analysis found out that the agricultural sector is more land incentive and therefore their prices fall more relative to other factors and this results in the decline in the agricultural products compared to those of the non-agricultural products due to reduced input cost, and as has been witnessed, the trade balance improves for the agricultural products as a result of falling prices (5-7).
In addition, the adverse effect of the yuan currency appreciation increases as long as the deflation is concerned. Deflation imposes several challenges, including shrinking consumption and investment, raising unemployment rates as well as increasing the bad debt that is not healthy for the banks (Yang et al 6).
The deflation further weakens the demand since the consumers who anticipate for a further reduction in the price levels may choose to suspend consumption, therefore the yuan revaluation clearly depicts a decline in its GDP, imports, exports, and the price level (Yang et al 8). In conclusion therefore, the appreciation of the yuan would adversely affect consumers and the business both negatively and positively.
When the falling dollar is good or bad for the USA
A falling dollar simply means that the value of the dollar has gone down relative to the currency of the other trading partners. Several studies have indicated that the reduced value of the dollar is a result of the low interest rates, these low interest rates coupled with the budget deficit are what fuels inflation. If the dollar continues to weaken against the other currencies, especially the Chinese yuan, this may have an adverse effect on the foreign investment, hence scaring away the foreign investors (Cowen 2).
A fairly increased industrial production worldwide is one of the causes of the increased products prices in the USA, a weak dollar therefore boosts the economy, on the one side, and undermines the welfare of the citizens, on the other hand (Elwell 13).
On the other hand, a falling dollar may be bad to the U.S. economy in a number of ways; first, intense precariousness can raise the general concern and discourage economic commitment. Therefore, if the dollar falls, it will scare away the foreign investors and, as a result, it hurts the U.S. economy. In conclusion, therefore the falling dollar is more of a benefit than a cost to the United States economy.
Cowen, Tyler. “The Dollar Is Falling, and That’s Good News”. The New York Times, 2 December 2002: Print.
Elwell, Craig. The Depreciating Dollar: Economic Effects and Policy Response. Washington, D.C. Congressional Research Services, 2011. Web. <https://digital.library.unt.edu/>.
Get your first paper with 15% OFF
Fan, Emma X. Implications of a US Dollar Depreciation for Asian Developing Countries. Philippines: Asian Development Bank, 2002. Web. <https://www.adb.org/>.
Yang, Jun, Zhang, Wei and Tokgoz, Simla. “The Macroeconomic Impacts of Chinese Currency Appreciation on China and the Rest of world”: A Global Computable General Equilibrium Analysis. Washington, D C: International Food Policy Research Institute Publication, 2012. Print.