1 / 8

Correcting a BoP Deficit

Correcting a BoP Deficit. Fixed Rate  Automatic Adjustment Buy $ with reserves … M  … P  … X  Flex Rate … or Devalue Adjustable Peg Depreciation  X  ??? Im  ??? Depends on foreign elasticity of demand for your exports Depends on your elasticity of demand for imports.

janna
Download Presentation

Correcting a BoP Deficit

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Correcting a BoP Deficit Fixed Rate  Automatic Adjustment • Buy $ with reserves … M … P  … X  Flex Rate … or Devalue Adjustable Peg • Depreciation  X  ??? Im  ??? • Depends on foreign elasticity of demand for your exports • Depends on your elasticity of demand for imports

  2. Marshall – Lerner Condition:The Impact of Devaluation on Balance of Trade Balance of Trade = P X – ER ( P* Im ) = 0 initially When ER = ($/£)  [$ devalued] D{BoT} = P {d X} + ER P* {d Im} – d{ER} P* Im = Increased exports (in $) + Decreased imports (in £, translated to $ at ER) - Increased $ paid for initial imports … since ($/£)  If X don’t rise much (low elasticity of demand for X) and/or Im don’t fall much (low elasticity of demand for Im) • Devaluation may worsen BoT

  3. The J – Curve Responses to price changes take time • Elasticities are low in short – run • Elasticities are high in long – run In long – run, devaluation “improves” balance of trade • But in short – run, balance of trade may worsen  J - Curve

  4. Other Complications Devaluation increases costs of imports Higher costs of imported components  Higher costs of exports  Higher prices of exports • Less exports than otherwise • Things may get worse before they get better … if they get better at all

  5. When transactions are invoiced in $s, as many are, ’preciation doesn’t matter. • Also, much of price to consumer of imported goods is domestic value added (distribution costs, promotion/sales costs, profits) which are unaffected by ’preciation.

More Related