Question:
An appreciation of country’s currency is likely to increase its surplus in the trade balance if
(1) the sum of the elasticity coefficients of demand for exports and imports is less than unity.
(2) terms of trade become more favourable and demand for exports is more price elastic.
(3) the country exports manufactured goods and imports raw materials.
(4) demand for both exports and imports is elastic.
(5) export volume is large compared with import volume.
Correct Answer:
(1)
Answer Explanation:
The Marshall-Lerner condition states that a currency depreciation improves the trade balance if the sum of elasticities is > 1. Conversely, a currency appreciation will improve the trade balance only if the demand for exports and imports is highly inelastic (sum < 1), meaning volumes don't drop enough to offset the higher export prices.
Topic: Exchange Rates Year: 2023
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