$5.$ Exchange rates and the demand for domestic goods

Piano Palace Co$.$ produces electronic keyboards in the United States. Its most popular keyboard sells for $$1,200.$ KeySharp Co$.,$ Piano Palace's primary competitor, is based in Germany and sells keyboards to US customers online. KeySharp sells its keyboards for $800$ euros.

Suppose that initially, the exchange rate was $$1\mathrm{.}60$ per euro.

This means that the price of KeySharp$$s keyboards to US consumers was $800$ euros $\backslash$times $$1\mathrm{.}60$ per euro $=$$$1,280\mathrm{.}00$

$.$

This means that the price of KeySharp$$s keyboards to US consumers was

$$1\mathrm{.}60$

$.$ Because this dollar price of keyboards from KeySharp is lower than the dollar price of keyboards from Piano Palace, demand for Piano Palace keyboards is likely high relative to KeySharp$$s keyboards in the United States.

Now suppose that the euro weakens relative to the dollar, and the exchange rate changes to $$1\mathrm{.}25$

After this change, the price of KeySharp$$s keyboards to US consumers is

$$1\mathrm{.}25$

$.$ Because this dollar price of keyboards from KeySharp is now lower than the dollar price of keyboards from Piano Palace, demand for Piano Palace keyboards is likely rise relative to KeySharp$$s keyboards in the United States, due to the change in the exchange rate.

Suppose that Piano Palace not only sells keyboards in the United States but also exports and sells them to France $($another country in the eurozone$).$

When the euro was $$1\mathrm{.}60,$ consumers in France paid

$1\mathrm{.}6$

euros for keyboards from Piano Palace. At this exchange rate, the euro price of Piano Palace keyboards was higher than that of KeySharp keyboards. However, at the newer exchange rate, the euro price of Piano Palace keyboards is now

$1\mathrm{.}00$

$.$ This would cause French consumers to increase demand for Piano Palace keyboards, relative to KeySharp keyboards $.$

Generalizing from the results of this fictionalized scenario, when other currencies are weak against the dollar, US imports should be relatively $,$ while US exports should be relatively $,$ leading to a favorable position in terms of the balance of trade.