Question

Explain the importance of concept of Elasticity of Demand for international trade.

Answer 1

The concept of elasticity of demand is also crucially important in the field ofinternational economics. ... If thedemand for a country's exports is inelastic, the fall in the prices of exports as a result of devaluation will lower their foreign exchange earnings rather than increasing them.

Answer 2

Explanation:

In the field of international trade, a country's terms of trade will depend on the relative elasticity of demand for its export and import products. The relative elasticity will decide whether the country's export price would be higher than the price it pays for its imports.

- If the elasticity of demand for their export goods is lower than that for their import goods, then the export good's price would be higher than that of the import goods and, in that case, the terms of trade would be in favour of the country.

- On the other hand, if the elasticity of demand for the import goods is lower than that for the export goods, then the price of the import goods would be higher than that of the export goods and, thus, the terms of trade would be contrary to the country.