Economy, asked by vickysmn8375, 1 year ago

Impact of devaluation of currency on imports and exports

Answers

Answered by proabid0

hey mate here's yours answer A devaluation occurs in a fixed exchange rate. A depreciation occurs in a floating exchange rate system. Both mean a fall in the value of the currency. e.g. a devaluation in the Pound means it is worth less Euros. Effects of a devaluation 1. Exports cheaper. A devaluation of the exchange rate will make exports more competitive and appear cheaper to foreigners. This will increase demand for exports 2. Imports more expensive. A devaluation means imports will become more expensive. This will reduce demand for imports. 3. Increased AD. A devaluation could cause higher economic growth. Part of AD is (X-M) therefore higher exports and lower imports should increase AD (assuming demand is relatively elastic). Higher AD is likely to cause higher Real GDP and inflation. 4. Inflation is likely to occur because: Imports are more expensive causing cost push inflation. AD is increasing causing demand pull inflation With exports becoming cheaper manufacturers may have less incentive to cut costs and become more efficient. Therefore over time, costs may increase. 5. Improvement in the current account. With exports more competitive and imports more expensive, we should see higher exports and lower imports, which will reduce the current account deficit. Evaluation of a Devaluation The effect of a devaluation depends on: 1. Elasticity of demand for exports and imports. If demand is price inelastic, the a fall in the price of exports will lead to only a small rise in quantity. Therefore, the value of exports may actually fall. An improvement in the current account on the Balance of Payments depends upon the Marshall Lerner condition and the elasticity of demand for exports and imports hope it helps if it does, pls mark it as brainliest thx

Answered by Iammanjula

Answer:

Devaluation of a currency refers to the decreasing value of the currency of country trends to raised in its exports that makes foreigners buy country goods at cheaper. This situation is uncertain for every country because it depends on the price elasticity of exports and imports in the country.

Impact:

It boosts the exports of the country because exporters became more competitive in a global market. The price will begin to rise and normalize the initial effect of devaluation. It demotivates importers.
It shrinks the trade deficit because Exports will increase and imports will decreases as exports are cheaper and imports are expensive.