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8

Evans Alison and Chris Surran

The value of the US dollar can greatly influence the amount of imports and exports that flow in and out of the United States. A strong US dollar means that one US dollar typically has more value than one unit of a foreign country’s currency. When this is the case, foreign countries don’t tend to purchase as many US goods because they are more expensive relative to their domestic goods. Not only do exports decrease, but imports increase because it becomes cheaper to buy foreign goods. This phenomena causes US GDP to fall. On the other hand, when the US dollar is weak it’s value per unit is lower than the normal value per unit of another country’s currency. When this is the case, the US is less likely to import goods because they are more expensive than domestic goods. Also, a weak US dollar attracts foreign traders because US goods are less expensive than other countries’ goods. In this case, imports should decrease and exports should rise.

Since the Great Recession, the Trade Weighted U.S. Dollar Index, which is calculated against the United State’s main trading partners, has gradually risen. As the value of the dollar has risen, total net exports (exports – imports) has fallen, proving the theory stated above to be true. The strength of the US dollar has deterred foreign countries' interest in importing US goods. What would be a good way to weaken the US dollar to increase net exports and US GDP? Is there a better way to do this without having to weaken the US dollar?

18

Chris Surran and Evans Alison

 

Analyzing GDP growth year over year and Average Personal Savings Rate data yields interesting results. In general, GDP and personal savings rate seem to have an inverse relationship. However, GDP seems to take a quarter or two to react to this increase or decrease in personal savings. This relationship is very intuitive. As consumers start to save more money they begin to consume less. Since consumption is a major part of GDP, it makes sense that GDP growth would weaken in a period of increased savings. Conversely, in a period of decreased savings general consumption will increase, which in turn will lead to an increase in total GDP.

 

Since Q1 2016, the Personal Savings Rate has decreased from 5.7% to 2.6%. In the same period, GDP’s year over year growth has grown from 2.52% to 4.12%. This data seems to comply with the inverse relationship discussed above. Furthermore, similar trends can be found throughout the data set.

 

This relationship yields an interesting relationship. What is the optimal personal savings rate?