Impact of Currency Depreciation on Trade Balance

Hard International Economics Exchange Rates

In the context of international economics, exchange rates are crucial for understanding trade dynamics between countries. Suppose you are analyzing the effects of a 10% depreciation of the domestic currency on a country's economy. Assume that the country's exports are primarily elastic and imports are inelastic. Which of the following statements best describes the expected impact on the country’s trade balance?

The trade balance will deteriorate because the cost of imports will rise significantly.

The trade balance will improve as exports increase and imports remain relatively constant.

The trade balance will remain unchanged as the depreciation does not affect export quantities.

Hint

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