If the exchange rate between the dollar and euro is 1 to 1. Then a 100 million dollar Boeing jet should cost around 100 million euros. If inflation in the US is 5% (0% in Europe), then the Boeing jet would now be 105 million dollars in the US.

So, the dollar would fall 5% (.95 dollars for every euro)to equalize prices and make them equal in both countries. In my example at least, a falling dollar had no benefit, and the falling dollar made the prices equalize (.95 x 105 is around 100). How does falling dollar help, because aren’t prices always equal from purchasing power parity?


1 Answer 1

  1. You do not explain the context/source of your claim

falling dollar make goods cheaper for foreigners

  1. The claim is usually made in a ceteris paribus context. If everything else remains unchanged, such a shift in the exchange rate does make US goods relatively cheaper for holders of foreign currency.

  2. Your reasoning does not start from a ceteris paribus context, but assumes that prices have to remain equal (Law of One Price) and calculates the exchange rate from that. Unsuprisingly, starting from this assumption prices will remain equal.


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