A real depreciation leads to an immediate improvement in the trade bal...
- A real depreciation leads immediately to a worsening of the trade balance and an improvement in some time (ff months - 1 year).
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A real depreciation leads to an immediate improvement in the trade bal...
Explanation:
A real depreciation refers to a decrease in the value of a country's currency relative to other currencies. It means that the country's currency is becoming weaker compared to other currencies.
Trade Balance:
The trade balance is a measure of the difference between the value of a country's exports and the value of its imports. It reflects the net flow of goods and services in and out of a country.
Immediate Improvement:
The statement in question suggests that a real depreciation leads to an immediate improvement in the trade balance. However, this statement is false. Let's explore why.
Reasons:
1. Price Effect: When a country's currency depreciates, its exports become relatively cheaper for foreign buyers. This can potentially lead to an increase in the quantity of exports sold. However, it does not guarantee an immediate improvement in the trade balance. The price effect may take time to materialize, as it depends on various factors such as the elasticity of demand for exports and the time it takes for businesses to adjust their production and marketing strategies.
2. Income Effect: A real depreciation can also result in an income effect. As the country's currency becomes weaker, the prices of imported goods increase. This can lead to a decrease in the quantity of imports purchased by consumers and businesses. However, the income effect may not be immediate, as it depends on factors such as the availability of substitute goods and the time it takes for consumers and businesses to adjust their consumption and investment patterns.
3. Trade Elasticity: The responsiveness of trade to changes in currency values varies depending on the elasticity of demand for imports and exports. If demand for imports and exports is relatively inelastic, a real depreciation may have a limited impact on the trade balance. In such cases, the trade balance may not improve significantly in the short term.
4. Other Factors: The trade balance is influenced by various other factors such as domestic economic conditions, government policies, trade agreements, and global economic trends. A real depreciation alone cannot guarantee an immediate improvement in the trade balance if these other factors are not favorable.
Conclusion:
In conclusion, a real depreciation does not lead to an immediate improvement in the trade balance. While it may have the potential to affect the trade balance in the long run, the impact is not immediate and depends on various factors such as price elasticity, income effects, and other economic conditions.
A real depreciation leads to an immediate improvement in the trade bal...
Explanation:
A real depreciation refers to a decrease in the value of a country's currency relative to other currencies. This means that the country's currency becomes cheaper compared to other currencies. The impact of a real depreciation on the trade balance is not immediate and can have different effects depending on various factors.
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