The Future of the US. Dollar according to PPP Theory

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TheFuture of the US. Dollar according to PPP Theory

TheFuture of the US. Dollar according to PPP Theory

ThePPP theory gives the notion that a country’s power to counterdepression lies in its ability to ensure that the value of its moneyhas the same purchasing power as that of its equivalent in anothercountry. However, when a nation produces less goods and services thanthe total worth of its money, then it is essentially giving morepurchasing power to other countries and driving its own economy to astate of depression (Shukla, 2016). The American dollar stands achance of being undervalued in the event that the output of its goodsand services fails to grow at an equivalent rate.

Tomake the future of the U.S. Dollar more comprehensible, it isimportant to understand the possible exchange rate between theAmerican Dollar versus another currency a year from now. For example,if the inflation rate in the U.S. is going to grow by 5% morecompared to Japan, then it is likely that the American Dollar willdepreciate by 5% in relation to the yen. In an instance whereinflation between these two nations remains positive, then theAmerican Dollar is expected to drop in value relative to the Japanesecurrency. In this perspective, it is possible that the USD willdepreciate in value if the goods produced and services delivered donot parallel other economies (Shukla, 2016).

Inconclusion, if the U.S. economy aims to stay on the side of tradesurplus, then it has to ensure that the rate of its output remainspositive. Through this, the nation’s competitiveness will increasein equilibrium because it will be able to induce more export andreduce the rate of importation by its consumers (Misra &amp Yadav,2014). The resultant effect will be low nominal exchange rate.

References

Misra,S., &amp Yadav, P. K. (2014). InternationalBusiness: Text and Cases.PHI Learning Pvt. Ltd..

Shukla,U. K. (2016). International Business-Competing in the global marketplace. StTheresa Journal of Humanities and Social Sciences,2(2).