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12 February, 08:02

Problem 3.22: Trade Deficits and J-curve Adjustment Path 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

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  1. 12 February, 08:32
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    The pre-devaluation cost is ($880) and the pst-devaluation trade balance is ($1398)

    Explanation:

    Assumptions Values

    Initial spot exchange rate, $/fc $2.00

    Price of exports, dollars ($) * 20.0000

    Price of imports, foreign currency (fc) * 12.0000

    Quantity of exports, units * 100

    Quantity of imports, units * 120

    Percentage devaluation of the dollar 18.00%

    Price elasticity of demand, imports * (0.900)

    a. The pre-devaluation trade balance--

    Revenues from exports, $ $2,000

    Expenditures on imports, fc * 1,440

    Expenditures on imports, $ $2,880

    Pre-devaluation trade balance ($880)

    b. Resulting trade balance immediately after devaluation

    Revenues from exports, $ $2,000

    Expenditures on imports, fc * 1,440

    New spot exchange rate, after devaluation $2.36

    Expenditures on imports, $ $3,398

    Post-devaluation trade balance (currency contract period) ($1,398)
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