Will depreciation of the dollar decrease the US trade deficit with China?

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Authors
Freeman, Robert
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Issue Date
2011-04-05
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Abstract

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.

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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
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Wichita State University
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URCAF;
v.11;
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