Exercise-02-Solution

SuggestedAnswerstoTextbookQuestions2.(a)(b)(c)(d)(e)ExportQuantity10m10m10.5m11m14mImportQuantity.002m.002m.002m.0019m.0018mInDollars:ExportPrice$10$10$10$10$10ImportPrice$50,000$55,000$55,000$55,000$55,000ExportRevenue$100m$100m$105m$110m$140mImportSpending$100m$110m$110m$104.5m$99mTradeBalance0$10m$5m$5.5m$41mInEuros:ExportPrice20euros18.18euros18.18euros18.18euros18.18eurosImportPrice100,000euros100,000euros100,000euros100,000euros100,000eurosExportRevenue200meuros181.8meuros190.9meuros200meuros254.5meurosImportSpending200meuros200meuros200meuros190meuros180meurosTradeBalance018.2meuros9.1meuros10meuros74.5meuros3.(a)Inparts(d)and(e)ofquestion2,thetradebalanceimproves,whereasitworsensin(c)and(b).ThisisaresultofthefactthattheMarshall-Lernerconditionissatisfiedin(d)and(e)butnotin(b)and(c).(b)Incase(e),importspendingdoesnotchange.Thisisaresultofthefactthatimportelasticityisone.(c)Incase(d),exportelasticityisone,andthereforeexportrevenueineurosisunchanged.(d)Theinitialtradebalancewouldbe$50million.The10percentdevaluationwillleadtothesamepercentagechangeinquantitiesasintheabovecase,astheelasticitieshavenotchanged.However,sincetheinitialquantityofimportsislarger,therewillthenbealargerabsolutechangeinimports,importrevenue,andthetradebalance.4.(a)Thedevaluationwillincreasethedomesticpriceofimports,andtherewillthenbeamovementalongtheimportdemandcurvefromBtoA.Theeffectontotalimportspendinginthedomesticcurrencywillbeambiguous.Exportdemandwillshiftoutwards,thusleadingtoanincreaseinexportrevenue.(b)Ifimportelasticityexceedsone,thentotalspendingonimportswillfall,asthepercentagefallinimportquantitywillexceedthepercentageincreaseinthepriceofimports.Sincetotalrevenuefromexportsunambiguouslyincreases,thetradebalancemustimprove.