Assume the Canadian demand elasticity for imports equals 1.2, while the foreign demand elasticity for Canadian exports equals 1.8.Responding to a trade deficit, suppose the Canadian dollar depreciates by 10 percent.Other things equal, for Canada, the depreciation would lead to
A) a worsening trade balance-a larger deficit.
B) an improving trade balance-a smaller deficit.
C) an unchanged trade balance.
D) None of these are correct.

Question

Quizplus · Accepted Answer

A depreciation of the Canadian dollar would make Canadian exports cheaper for foreign consumers, increasing foreign demand for Canadian goods. With a foreign demand elasticity for Canadian exports of 1.8, this would lead to a larger percentage increase in exports. At the same time, imports from foreign countries would become more expensive for Canadians, decreasing Canadian demand for foreign goods. With a Canadian demand elasticity for imports of 1.2, this would lead to a smaller percentage decrease in imports. These combined effects would likely lead to an improvement in Canada's trade balance and a smaller deficit.

Assume the Canadian Demand Elasticity for Imports Equals 1