Teaching Global Influences of Exchange Rates and Trade

Abstract

A teaching heuristic is presented to illustrate the influences of exchange rates on U.S. exports and imports. Economic theory in this area has stressed relative prices and incomes as dominant influences on trade flows. Recent integration of world financial markets and free capital flows for major currencies have created a new environment of volatile exchange rates, which have a serious impact on world economies and which have created a globalization of markets and industries and new company strategies. This paper presents a model in which we explain relationships between a strong and weak U.S. dollar and trade flows. We discuss earlier economic explanations of exchange rates influences compared with current integrative influences. The purpose of the paper is to present a basis for instructing students about the interactions of exchange rates, trade, financial flows and politics in the world economy, using the U.S. as the focus of discussion.