urrent exchange rate converts the cost of the goods into a common denominator, andallows each respective country to figure price differentials that are in their favor. It isassumed that there is a competitive market. (The prices and exchange rate used arehypothetical - not the actual current rates.)Price and Cost Differences As the chart above shows, when comparing soybeans and gloves, the price of gloves inthe U.S. are half the price of gloves in the U.K. The price of soybeans is similar. Theprice of stereos, however, are in favor of the U.K., since the cost 300 dollars in the U.S.and would cost 180 dollars in the U.K. As a result of these differences, the U.S. wouldbe more likely to export gloves and soybeans, and to import stereos from the U.K.6 If the exchange rate were to change, the prices of goods in dollars would also change,possibly creating change in the desire for countries to import or export certain goods. Forexample, if the exchange rate between the U.S. and the U.K. grew to $10 per pound, thanthe cost of goods in the U.K. would become very expensive, and the U.S. would want toexport all goods to the U.K. The Exchange Rate and the Strength of the DollarAnother factor when examining the effects of the exchange rate on trade is the strength ofthe dollar. Economists have varying opinions on the pros and cons of a strong dollar anda weak dollar. Some experts believe that a weak dollar could be the first step toward financial marketstability. They believe that an orderly decline in the dollar accomplishes several thingscrucial to getting the global econom back on its feet. This includes lifting price powerand boosting exports in the manufacturing sector, relieving pressure on economies withdollar-pegged exchange rates, lifting the export competitiveness of emerging Asiannations by providing a currency advantage over Japan, and help redirecting capital tonon-dollar investments, which is a crucial step in restarting hur...
