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CHAPTER 3 • THE EXTERNAL ASSESSMENT 65

as much when the value of the dollar is low; rather, foreigners visit and vacation more
in the United States.
A low value of the dollar means lower imports and higher exports; it helps U.S.
companies’ competitiveness in world markets. The dollar has fallen to five-year lows
against the euro and yen, which makes U.S. goods cheaper to foreign consumers and
combats deflation by pushing up prices of imports. However, European firms such as
Volkswagen AG, Nokia Corp., and Michelin complain that the strong euro hurts their
financial performance. The low value of the dollar benefits the U.S. economy in many
ways. First, it helps stave off the risks of deflation in the United States and also reduces the
U.S. trade deficit. In addition, the low value of the dollar raises the foreign sales and prof-
its of domestic firms, thanks to dollar-induced gains, and encourages foreign countries to
lower interest rates and loosen fiscal policy, which stimulates worldwide economic expan-
sion. Some sectors, such as consumer staples, energy, materials, technology, and health
care, especially benefit from a low value of the dollar. Manufacturers in many domestic
industries in fact benefit because of a weak dollar, which forces foreign rivals to raise
prices and extinguish discounts. Domestic firms with big overseas sales, such as
McDonald’s, greatly benefit from a weak dollar.
Between March and June 2009, the U.S. dollar weakened 11.0 percent against the euro,
due to the growing United States debt, which may soon exceed $12 trillion. Table 3-3 lists
some advantages and disadvantages of a weak U.S. dollar for American firms.
Rising unemployment rates across the United States have touched off a race among
states to attract businesses with tax breaks and financial incentives. New Jersey has
promised to send a $3,000 check to every small business that hires a new employee.
Minnesota is offering tax-free zones for companies that create “green jobs.” Colorado has
created a $5 million fund for banks that open credit lines for small businesses. To minimize
risk in incentive deals, may states write in claw-back provisions that require companies to
return funds if they fail to create the promised number of jobs.
The slumping economy worldwide and depressed prices of assets has dramatically
slowed the migration of people from country to country and from the city to the suburbs.
Because people are not moving nearly as much as in years past, there is lower and lower
demand for new or used houses. Thus the housing market is expected to remain very slug-
gish well into 2010 and 2011.

TABLE 3-3 Advantages and Disadvantages of a Weak Dollar
for Domestic Firms
Advantages Disadvantages
1. Leads to more exports 1. Can lead to inflation
2. Leads to lower imports 2. Can cause rise in oil prices
3. Makes U.S. goods cheaper to foreign consumers 3. Can weaken U.S. government
4. Combats deflation by pushing up prices 4. Makes it unattractive for Americans
of imports to travel globally
5. Can contribute to rise in stock prices 5. Can contribute to fall in stock prices
in short run in long run
6. Stimulates worldwide economic recession
7. Encourages foreign countries to lower
interest rates
8. Raises the revenues and profits of firms that
do business outside the United States
9. Stimulates worldwide economic expansion
10. Forces foreign firms to raise prices
11. Reduces the U.S. trade deficit
12. Encourages firms to globalize
13. Encourages foreigners to visit the United States