Why is a depreciation or devaluation of the nation's currency unable to eliminate a trade balance deficit when the country's demand for imports and the foreign demand for the country's exports are both highly inelastic?
What will be an ideal response?
POSSIBLE RESPONSE: The trade balance is the difference between the money value of exports and the money value of imports. For each, money value is price times quantity. Depreciation lowers the foreign-currency price of exports, so export quantity tends to increase, and depreciation increases the domestic-currency price of imports, so import quantity tends to decline. If demands are highly inelastic, the quantity changes are very small. Consider measuring the trade balance in foreign currency values. With inelastic demand, the value of exports decreases. With inelastic demand, the value of imports decreases by a very small amount. Putting these together, the value of the trade balance deteriorates (becomes more negative) as long as the value of exports falls by more than the value of imports decreases.
You might also like to view...
As long as the supply curve for a good is upward sloping and the demand curve is downward sloping, a sales tax imposed on sellers shifts the supply curve
A) leftward and definitely raises the equilibrium price. B) leftward and possibly raises the equilibrium price. C) rightward and possibly increases the equilibrium quantity. D) rightward and definitely decreases the equilibrium quantity.
Competition in the form of advertising, better customer service, or longer warranties can also reduce profits by raising costs
Indicate whether the statement is true or false