Question

Chapter 2 12. International Investments U.S.-based MNCs commonly invest in foreign securities. a. Assume that the dollar is presently weak and is expected to strengthen over time. How will these expectations affect the tendency of U.S. investors to invest in foreign securities? 13. Exchange Rate Effects on Trade a. Explain why a stronger dollar could enlarge the U.S. balance-of-trade deficit. Explain why a weaker dollar could affect the U.S. balance-of-trade deficit. 14. Impact of Government Policies on Trade Governments of many countries enact policies that can have a major impact on international trade flows. a. Explain how governments might give their local firms a competitive advantage in the international trade arena. 15. China-U.S. Balance of Trade There is an ongoing debate between the United States and China regarding whether the Chinese yuan's value should be revalued upward. The cost of labor in China is substantially lower than that in the United States. a. Would the U.S. balance-of-trade deficit in China be eliminated if the yuan was revalued upward by 20 percent? Or by 40 percent? Or by 80 percent? b. If the yuan was revalued to the extent that it substantially reduced the U.S. demand for Chinese products, would this shift the U.S. demand toward the United States or toward other countries where wage rates are relatively low? In other words, would the correction of the U.S. balance-of- trade deficit have a major impact on U.S. productivity and jobs?

Answer 1

Answering the first question(Q12 as given in the image) here.
As it’s given that’s the dollar is going to strengthen in time.
a) This will increase the per dollar buying power of the International US based MNCs, as for each dollar now they will be able to buy more amount of foreign shares.
b) If already holding foreign investments : This will result in the decrease in value of the money when converted from foreign currency to US currency, hence creating a loss, though this could have saved if they would have already done currency hedging.

So in brief, the initial impact is gonna be unprofitable if holding large chunks of foreign investments, but will get converted to positive impact with time as they start buying foreign investments after the strengthening of the dollar against foreign currencies.