Topic: Liberalization of Economy, International Trade
4. How does the international value of the US dollar impact the trade balance of a nation? To what extent have countries been able to shed their dependence on the US dollar for international trade? Briefly mention the advantages and challenges of doing so. (250 Words)
Difficulty level: Moderate
Reference: The Hindu
Why the question:
Based on an editorial in the Hindu
Key Demand of the question:
To write about the impact and influence that the US dollar holds on international trade. The advantage and challenges of ‘De-dollarization’.
Introduction:
Introduce the international trade system and supply chain. Briefly mention why the US dollar is so important for it.
Body:
Mention the impact of changes in the value of currency vis-à-vis the US dollar e.g. When a country’s exchange rate increases relative to other countries, the price of its goods and services increases. Imports become cheaper. Ultimately, this can decrease that country’s exports and increase imports.
Next, mention the efforts put by countries to remove their dependence on dollars. Cite examples of currency swap agreements and other arrangements.
Then in 3-4 points, each mentions the advantages of the ‘de-dollarization’ of a national currency (take the case of India) and the challenges in doing so.
Conclusion:
Conclude by mentioning that our supply chain network and trade are still not in a position to ‘de-dollarize’ themselves completely but efforts are commendable.
