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March 24, 2008

Are we responding to the lower dollar?

The lower-valued dollar, when measured against foreign currencies, is supposed to cut American's appetite for foreign-made products. Has this happened? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"It really has, and this something, I think, that has really been under the radar, hasn't been well appreciated by most people. If you look at our monthly trade deficit, it's actually down by 15 percent since its peak in 2006. Even more noteworthy, I think most people know that a big part of our trade deficit is oil and oil imports, and that's hard to change. But let's take out oil from the equation and look at everything else we're buying from foreign countries, and look at that trade deficit. That trade deficit when you exclude oil is down a whopping 50 percent since 2006. So these changes in our trade deficit are exactly in line with what economists would expect, that is, when the dollar goes down, it makes foreign imports more expensive, so naturally people try to cut back and substitute other things for those foreign imports. And in fact, this really goes hand-in-glove with reducing that trade deficit. The trade deficit in the first place causes the dollar's value to go down, then the lower-value dollar actually causes the trade deficit to get smaller, exactly what economics would predict."

Posted by Dave at March 24, 2008 08:00 AM