In 2010, arguing that the Chinese yuan was overvalued versus the U.S. dollar, Pr

Question

In 2010, arguing that the Chinese yuan was overvalued versus the U.S. dollar, President Barack Obama said he wanted "to make sure our goods are not artificially inflated in price and their goods are not artificially deflated in price; that puts us at a huge competitive disadvantage." What does the value of the yuan have to do with U.S. goods being "artificially inflated in price" or Chinese goods being "artificially deflated in price"? Why would this "inflation" and "deflation" in prices put U.S. goods at a competitive disadvantage?

Explanation / Answer

a. Since the chinese goods are imported in U.S , and if the value of Yuan was overvalued versus the U.S dollar, then the Value of goods imported to U.S will be cheaper in the U.S dollars terms when compared to the U.S produced goods as there values are already in Dollar.

So, due to high exchange rate(yuan/dollar), the dollar prices of chinese goods are artificially deflated and U.S goods have to compete with these goods , so there value artificially inflated.

b. Since due to the high  exchange rate(yuan/dollar), the chinese goods are available here at cheaper dollar prices , so it put U.S produced goods at competitive disadvantage as there prices will be now higher than the prices of chinese imported goods.

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