When the exchange rate of a country depreciates, the balance of trade improves

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When the exchange rate of a country depreciates, the balance of trade improves

Advantages

  • exports cheaper
  • foreigners buy more with the same money
  • demand rises
  • imports more expensive
  • more money is needed to buy a small quantity of goods
  • demand falls
  • BOP surplus
  • rise in balance of payments

Disadvantages

  • exports have poor quality
  • demand won't rise, even if they are cheap
  • If imports are necessary products
  • demand won't fall even if price is high
  • imports have higher demand
  • BOP deficit
  • fall in balance of payments

Evaluation

The depreciation of a currency may not lead to a BOP surplus if other countries dump their goods in the home country, flooding the market with cheap imports. But whether or not the balance of trade improves depends on the level of depreciation, whether or not the currency of other countries has depreciated or appreciated and the PED and quality of imports. The government could use interest rates to keep the currency under control and supply side policies to reduce import and improve export.

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