Question
Suppose a country's currency is initially valued at 1 unit per $1 USD. Due to economic reasons, the government decides to devalue its currency
Suppose a country's currency is initially valued at 1 unit per $1 USD. Due to economic reasons, the government decides to devalue its currency by 10%. The price elasticity of demand for its exports is estimated to be -2.0, and the price elasticity of demand for its imports is estimated to be -1.5 Using the Lerner condition formula (= (PMC)/P), where y is the elasticity of demand, P is the price, and MC is the marginal cost, and assuming that marginal cost remains constant, calculate the change in the trade balance following the devaluation. The animal price for exports is $100 and for imports is $120. The marginal cost for both remains constant at $80.
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