Benefits and Costs of Falling Dollar
                     BENEFITS AND COSTS OF 
FALLING DOLLAR
INTRODUCTION
Between 2006 and early 2008, there was a 15% 
fall in the trade-weighted value of the dollar.
Then from 2008 to 2011, there was another fall 
of around 15%.
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 FALL IN THE VALUE OF 
THE DOLLAR 
• Makes US exports cheaper to foreigners 
importing US Goods.
• It is cheaper for non-US citizens to go on 
holiday to the US.
• US consumers face higher price of imported 
goods.
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A BOOST IN THE US 
MANUFACTURING 
SECTOR
• A lower dollar increases the price 
competitiveness of US exports. Cheaper 
exports will lead to an increase in demand. If 
demand is price elastic then there will be an 
increase in the value of exports.
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INFLATION
• Import prices will rise causing a degree of 
imported inflation
• The rise in aggregate demand from cheaper 
exports
• The fall in the value of the dollar may reduce 
the incentives for firms to cut costs because 
they get an ‘easy’ improvement in 
competitiveness. Therefore, a fall in the 
dollar may harm long-term competitiveness.
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FALL IN 
IMPORTS/SWITCH TO 
DOMESTIC GOODS
• As a result of the fall in the dollar, US 
consumers will face increased prices of 
European /imported goods, so the growth in 
demand for imports will slow. It may 
encourage US consumers to switch to 
domestically produced goods.
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 IMPROVEMENT IN US 
CURRENT ACCOUNT
• Between 2006 and 2008, there was a 
significant fall in the value of the dollar. This 
period 2006-08 also saw a sharp 
improvement in the US current account. (It is 
worth noting the improvement was also 
caused by lower growth and less import 
spending)
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A TEMPORARY 
IMPROVEMENT IN US 
ECONOMIC GROWTH AND 
EMPLOYMENT
With rising export demand this will help 
increase output and therefore there will be a 
reduction in unemployment. Also, with imports 
more expensive, this will increase the demand 
for domestically produced goods. 
Therefore, a fall in the value of the dollar can 
boost the rate of growth – especially if there is 
spare capacity in the economy.
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LOWER GROWTH AND 
LOWER INFLATION IN 
US TRADING PARTNERS
Inflation will be lower in the EU; this is because
Imported goods will be cheaper (Many raw 
commodities are priced in dollars)
AD will be lower or increase at a slower rate.
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PRESSURE TO DEVALUE 
CURRENCIES LINKED 
TO THE DOLLAR
Some Latin American and Asian countries such 
as Thailand have a semi-fixed exchange rate 
against the dollar. Thus if there is a fall in the 
dollar, they will also see a fall in the value of 
their currency – helping their exports, though it 
could contribute to inflation.
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 IMPACT ON CHINA
China’s economy is reliant on exports and the 
competitiveness of it goods. A fall in the value 
of the dollar against the Yuan, will make 
Chinese exports less competitive and it could 
lead to a fall in demand for Chinese exports.
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