what impact might a significant currency depreciation of the US dollar have in the short run on US current account position?
The most obvious effects of dollar depreciation on the DP accounts are evident in the impacts on net exports, GDP, and prices. Current-dollar GDP: When the dollar depreciates against major foreign currencies, one generally expects to see current-dollar exports increase, as U.S. produced goods become cheaper abroad. The effect on current-dollar imports is more ambiguous: Depreciation increases the dollar cost of a given volume of imports, but the volume may decline to the extent that domestic goods and services are substituted for imports in response to the increase in the relative cost of purchases from abroad. Assuming that the export stimulus effect and the volume effect on imports together outweigh the import-cost effect, dollar depreciation would be expected to lead to an improvement in U.S. competitiveness, an improvement in net exports, and a corresponding increase in GDP. The price and quantity effects that move in opposite directions as a result of U.S. dollar depreciation are often difficult to identify separately from movements due to other market forces. For example, dollar depreciation against oil-producing nations’ currencies would result in an increase in the price of imported petroleum and a likely decrease in the quantity of petroleum imported -- the magnitude of the response would be determined by the product’s elasticity (responsiveness to price change). However, other developments in the economy may also affect the demand for petroleum, such as cyclical fluctuations or changes in fuel economy, to a degree that often cannot be readily determined. In addition, the separate effects may be difficult to identify because the foreign supplier may not fully pass through the costs associated with dollar deprecation or the domestic seller of the imported product may absorb some of these costs. Real GDP: The effect of dollar depreciation on real GDP is less ambiguous than the effect on current-dollar GDP. Assuming that it is possible for domestic production to substitute for imports, dollar depreciation will lead to increases in U.S.-based production as domestically produced goods are substituted for imported goods. This would lead to an increase in real GDP and a decrease in real imports. Dollar depreciation may also lead to an increase in U.S.-based production for export, as foreigners substitute “cheaper” U.S. goods for goods produced in their own countries. This added production would also lead to an increase in real GDP. The ultimate effect, however, of dollar depreciation on GDP depends on many factors, including the extent to which other countries adjust their own currencies in response to dollar depreciation.