The stronger the US dollar is relative to the rest of the world, all else constant, the larger the net exports in the US. True or False?
This statement is false. When the US dollar is strong with respect to the currencies in the other countries, the United States’ net exports will be lower than they would otherwise be. There is an inverse relationship between the strength of a currency and the country’s ability to export. Let us see why this is so.
When a firm in, for example, Japan, wants to import something from the United States it will need to buy American dollars. It will need to use Japanese yen to buy the US dollars. It will then use the US dollars to buy the product from the US company.
If the US dollar becomes stronger, it will be harder for the Japanese country to buy the dollars it needs. The dollar will cost more yen and the Japanese company will have a harder time buying those dollars. When the price of these dollars goes up, it will be less possible for the Japanese companies to buy American exports.
Thus, when the US dollar gets stronger, American exports weaken. Therefore this statement is false.