Explain the concept of devaluation, and explain the effect devaluation has on the price of a country's imports.

What are some effects on the industry? Buying and selling countries? Give an example that supports your claims.

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Joshua StredderLv10

28 Sep 2019

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can someone please tell me if this answer is correct? thequestionis worth 20 marks.... thank you!

MARSHALL LERNER CONDITION

The condition states that, for a currency devaluation tohave apositive effect on trade balances, the sum of priceelasticity ofincome ( in absolute value ) must be greater thanone.

The M-L Condition and the J curve show the relationship betweentheexchange rate of a nationâs currency and the countryâsbalance oftrade.

If a countryâs currency depreciates relative to othercurrencies,then this should lead to an improvement in thecountryâs balance oftrade. The weaker dollar now means thatforeigners will now have tospend less of their dollars in order togain one dollarâs worth oflocal currency. Since the localdollar is now worth less, localswill now have to pay more forimports; hence reducing the level ofimports.

What matters is not whether a country imports less andexportsmore, rather, whether the increase in income form exportsexceedsthe decrease in expenditure from imports for a particularcountry.M-L condition examines the price elasticises of demand forexportsand imports for a particular country.

E.g. country A experiences a devaluation of its currency

If foreigners demand for exports from country A isrelativelyelastic, then a slightly weaker dollar will cause adramaticincrease in the demand for Aâs output, causing exportincomefor A to increase dramatically. On the other hand, ifAâsdemand for imports is highly price elastic, then aslightly weakerdollar will cause Aâs demand for imports todecrease drastically,causing a reduction in Aâs expenditurefrom imports.

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QUESTION 7

Suppose there are only two countries in the world, Country A and Country B. The following table contains information on each country's demand and supply of some good.

	Country A	Country B
Demand	Q = 107 - 2P	Q = 167 - 1P
Supply	Q = 1P - 28	Q = 3P - 17

If there is free trade between these two countries, what would be the quantity of Net Exports in Country A?

Round your answer to two decimal places. Remember, Net Exports is Exports - Imports. If your answer is negative, be sure to include the negative sign.

QUESTION 8

Suppose there are only two countries in the world, Country A and Country B. The following table contains information on each country's demand and supply of some good.

	Country A	Country B
Demand	Q = 187 - 1P	Q = 137 - 3P
Supply	Q = 3P - 14	Q = 3P - 26

If there is free trade between these two countries, and this is the only good in which these two nations trade, what would be the value of Country B's Trade Balance?