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The chapter notes that the rise in the U.S. trade deficit during the 1980s was due largely to the rise in the U.S. budget deficit. On the other hand, some in the popular press have claimed that the increased trade deficit resulted from a decline in the quality of U.S. products relative to foreign products. Assume that U.S. products did decline in relative quality during the 1980s.

Indicate the effect of this shift in net exports on the U.S. market for foreign exchange.

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Answer:

It is evident and true that the trade deficit may rise due to the decline in the exported quality of products. And hence when this happens, this means that the demand for US dollar would decrease as the firms producing the goods for exporting would decrease their supply due to decreased demand from importers.

The result would be less production in the US for export purposes, which will lead to less employment and low GDP. And hence, the final result would be less value of the US dollar in the foreign market which will lead to the depreciation of US dollar in terms of other currencies.

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