Question

Assume the United States has the following import/export volumes and prices. It undertakes a major "devaluation" of the dollar, say 18% on average against all major trading partner currencies. What is the pre-devaluation and post-devaluation trade balance

Answer 1

Answer:

The pre-devaluation trade balance is -$880 while the post-devaluation trade balance is -$1,398.4.

Step-by-step Explanation:

Step 1: Value Assumptions

Assuming the following import/export volumes and prices:

Initial spot exchange rate ($/fc)                    2

Price of exports, dollars                                20

Price of imports, foreign currency (fc)          12

Quantity of exports, units                              100

Quantity of imports, units                              120

Percentage devaluation of the dollar           18%

Price elasticity of demand, imports               -0.9

Step 2: Calculation of Pre-Devaluation Trade Balance

Revenue from exports = Quantity of exports x Price of exports

                                      = 100 x $20

                                      = $2,000

Expenditure on imports = Quantity of imports x Price of imports x Initial spot exchange rate

                                       = 120 x $12 x 2

                                       = $2,880

Pre-devaluation trade balance = Revenue from exports - Expenditure on imports

                                                  = $2,000 - $2,880

                                                  = -$880

Step 3: Calculation of Post-Devaluation Trade Balance

Revenue from exports = Quantity of exports x Price of exports

                                      = 100 x $20

                                      = $2,000

Expenditure on imports = Quantity of imports x Price of imports x New spot exchange rate

                                       = 120 x $12 x 2(1.18)

                                       = $3,398.4

Post-devaluation trade balance = Revenue from exports - Expenditure on imports

                                                   = $2,000 - $3,398.4

                                                   = -$1,398.4