Country X has an income elasticity of demand for exports and imports of one and three, respectively. If foreign income and domestic income both rose by the same amount, what would tend to happen to the trade balance?

Question

Quizplus · Accepted Answer

The Answer is The trade balance would decline over time as income increases. If exports and imports were initially equal then the trade balance would decline by 2% as incomes increased by 1%.

Country X Has an Income Elasticity of Demand for Exports