Which of the following is NOT true about the trade relationship between two countries, such as China and the U.S.?

Question

BlackTom AI · Accepted Answer

Let's evaluate each statement in the context of international trade and currency effects, keeping in mind typical macro theory.
Option 1: 'Net exporters, such as China, have stronger local currencies than net importers, such as the US.' This is not generally true. In many cases, net exporters actually tend to have weaker or undervalued currencies to boost competitiveness of their goods abroad. A strong export sector does not automatically translate into a stronger currency; capital flows, monetary policy, and reserve management also influence exchange rates. Therefore, this statement contradicts common empirical patterns where large exporters do not necessarily possess the strongest currencies.
Option 2: 'An appreciation of a country's currency (e.g., a stronger USD relative to the Chinese Yuan) tends to stimulate the country's imports and encourage outward foreign direct investment.' When a currency appreciates, imports become cheaper for residents, and exports become more expensive, which can indeed boost imports. As for outward FDI, a stronger domestic currency can make foreign assets cheaper in terms of domestic currency, potentially encouraging investment abroad; however, the extent depends on corporate strategy and financial conditions. This statement captures the plausible directional effects of appreciation, though the strength of the link to outward FDI can vary by context.
Option 3: 'The trade balance between China and the US depends not only on product prices but also on the prevailing exchange rate of the Yuan relative to the US dollar.' This is a correct and standard point: exchange rate movements alter relative prices and demand, influencing the trade balance beyond just raw product prices. It acknowledges currency fluctuations as a key channel in bilateral trade.
Option 4: 'A country like China that has excess savings over domestic investment can invest in other foreign countries.' This describes the-saving-investment balance and capital outflows: when a country saves more than it invests domestically, it can lend or invest abroad, contributing to capital exports. This is a well-supported mechanism in international finance.
In summary, Option 1 is the outlier in this set because it makes a generalized claim about exporters having stronger currencies, which contradicts common economic understanding that exporters often face currency regimes that are not inherently stronger and may even be weaker to sustain export competitiveness. The remaining options describe credible mechanisms of how exchange rates, trade balances, and capital flows interact in a bilateral context.

Which of the following is NOT true about the trade relationship between two countries, such as China and the U.S.?

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