Economics – International trade and globalisation - Current account of the balance of payments | e-Consult
International trade and globalisation - Current account of the balance of payments (1 questions)
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Diagram: Impact of a Devaluation on Balance of Payments
| Cell |
| Currency Value |
| Exports |
| Imports |
Mechanism of Improvement:
- Exports Become Cheaper: A devaluation makes exports cheaper for foreign buyers.
- Imports Become More Expensive: A devaluation makes imports more expensive for domestic consumers and businesses.
- Increased Export Demand: Cheaper exports lead to increased demand for domestically produced goods and services.
- Decreased Import Demand: More expensive imports lead to decreased demand for foreign goods and services.
- Improved Trade Balance: The increased export demand and decreased import demand improve the trade balance, which is a key component of the current account.
Potential Drawbacks of a Devaluation:
- Increased Import Costs: While exports become cheaper, imports become more expensive, potentially leading to higher inflation.
- Reduced Purchasing Power: Consumers may experience a reduction in their purchasing power as the cost of imported goods rises.
- Potential for Retaliation: Other countries may retaliate with tariffs or other trade barriers, harming the country's export sector.