AP Macroeconomics AMSCO Guided Notes
6.5: Changes in the Foreign Exchange Market and Net Exports
AP Macroeconomics Guided Notes
AMSCO 6.5 - Changes in the Foreign Exchange Market and Net Exports
Essential Questions
- How do changes in currency value affect net exports and aggregate demand?
I. Net Exports and GDP
1. What is the GDP expenditures formula and what does the (X-M) component represent?
2. How do trade surpluses and trade deficits affect a country's economic growth differently?
3. Why does the United States maintain persistent trade deficits despite being one of the world's most productive countries?
II. Net Exports and the Foreign Exchange Market
A. Currency Appreciation
1. How does currency appreciation affect the competitiveness of a country's exports in foreign markets?
2. Using the smartphone component example, explain how a stronger dollar affects Mexican importers' purchasing decisions.
B. Currency Depreciation
1. How does currency depreciation improve a country's export competitiveness in foreign markets?
2. Using the shorts example, explain how peso depreciation allows Mexican exporters to maintain profits while lowering prices.
C. Effects of Depreciation
1. What is the closed feedback loop between currency exchange rates and net exports, and how does it work?
2. When one currency appreciates against another, what necessarily happens to the other currency and why?
III. Net Exports and the Balance of Trade
1. How does the impact of trade deficits differ between small countries like Haiti and large economies like the United States?
2. What are the main reasons the United States has maintained trade deficits since 1976 despite being the world's largest economy?
3. Why does the reliability of the U.S. dollar help mitigate the negative effects of persistent trade deficits?
Key Terms
net exports
trade surplus
trade deficit
appreciates
depreciates
balance of trade