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Will depreciation of the dollar decrease the US trade deficit with China?
Using data on exchange rates, Chinese imports and exports, Chinese income, and relative price between the US and China, I applied regression analysis to determine whether there is a connection between a weakening of the US dollar and an increase in Chinese imports from the US. I studied the price elasticity and income elasticity for both the short run and long run. The key hypothesis is that the gains in US exports to China due to a weaker dollar will be offset by decreased Chinese income from exporting to the US. This will diminish the hope of improving the U.S. trade deficit with China. I found that the short run income elasticity for Chinese imports is 1.3229, while the US_ was approximately 5 times greater at 6.7960. The short run price elasticity for Chinese imports was -0.1047, and the US_ price elasticity is -0.4220. Similarly, I found that the long run income elasticity for Chinese imports is 1.3172, a number much smaller than the income elasticity of the US, 7.3024. The long run price elasticity for Chinese imports, -0.0031, is also much smaller than the US price elasticity, -0.9253.
Second place winner of oral presentations in the Humanities/Social Science section at the 11th Annual Undergraduate Research and Creative Activity Forum (URCAF) held at the Rhatigan Student Center , Wichita State University, April 5, 2011