Trade Deficits and J-Curve Adjustment

Paths.

Assume the United States has the following import/export

volumes and prices. It undertakes a major "devaluation" of the dollar, say 20%

on average against all major trading partner currencies. What is the pre-devaluation and post-devaluation trade balance?

Initial spot exchange rate, $/fc1.87Price of exports, dollars ($)18.0900Price of imports, foreign currency (fc)11.8000Quantity of exports, units120Quantity of imports, units140Percentage devaluation of the dollar20.00

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Part 1

What is the pre-devaluation trade balance?