Question

quiclet assume a country is running a trade deficit. According to economic theory how would a depreciation of that country's currency affects its (negative)trade balance

Answer 1

When the local currency falls in value, imports become more expensive, causing locals to purchase fewer imported goods. Exports, on the other hand, are less expensive to international buyers, so their demand rises. Fewer imports and more exports will reduce the trade deficit and may even result in a surplus.

What is trade deficit?

The difference in the monetary value of a country's exports and imports over a given time period is known as the balance of trade, commercial balance, or net exports. A distinction is sometimes made between a trade balance for goods and one for services.

The net-export effect works as follows: A higher price level raises the relative cost of domestic exports to other countries while lowering the relative cost of foreign imports from other countries. As a result, exports fall while imports rise, resulting in a drop in net exports.

The net export variable is critical in calculating a country's GDP. A trade surplus boosts the country's GDP.

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