Chris Goodrich

Many business news sources have been reporting that the dollar has been gaining strength against other foreign currencies.  The dollar has gained about 5% against the euro and as much as 7% against the yen.  Although this will provide a long-run benefit, it may actually be detrimental to our economy in the short-run.

The academic definition of a recession is:  two or more consequitive quarters of negative growth in gross domestic product (GDP).

Look for a second at the equation that defines GDP: (foregive me for the simplified version here)

GDP = Consumption + Net Exports where Net Exports = Exports - Imports

The value of the dollar has a major influence on Net Exports.  When the dollar is weak, it attracts exports.  The weakness of the dollar means that foreign nations can purchase goods for much cheaper if they purchase them from the United States.

For example:  Say there is a widget that can be purchased in both Europe and the United States that costs 100 Euros and $125 United States Dollars.  The current exchange rate is 1 Euro for every $1.4691 United States Dollars.  This means that someone from Europe can purchase the product from the United States for about 85 Euros, a 15% savings.

Currently our economic growth is led by strong exports because of our weak dollar.  In the past year, we have seen very little growth in consumption, but higher levels of growth in net exports.

However, if the dollar strengthens, we are fronted with the possiblity of losing the only real economic growth we have left, which could end the debate over the United States recession of 2008.