Often, when unemployment rises sharply in the presence of trade deficits, people raise alarms about a nation’s productivity and competitiveness. Just such a situation occurred in the United States in the 1980s, and a review of this history is a helpful reminder about the determinants of trade flows. The overvalued dollar in the 198,Os produced severe economic many U.S. sectors exposed to dimensional trade. Industries like automobiles, steel. textiles, and agriculture found the’ demand for their products shrinking as exchange rate appreciation led to a rise in their prices relative to the prices of foreign competitors. Unemployment ill America’s manufacturing heartland increased harpy, factories were closed, and the Midwest be Guile known as the “rust belt.”

Make sure understand this fundamental point about competitiveness: As the theory of comparative adman lage demonstrates. nations are 11 inherently uncooperative. Rather. they .become noncompetitive when their prices move of line from those’ of their trading partners because of an overvalue- d exchange rate.

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