The immediate impact on the balance of trade (BOT) for a country in deficit when there is an immediate devaluation of its currency is likely to be an even larger BOT deficit than prior to devaluation.

Question

Quizplus · Accepted Answer

When a country's currency is devalued, its exports become cheaper and imports become more expensive. This means that the demand for exports may increase, leading to an increase in export revenue. However, the increased cost of imports could cancel out the gains from exports, leading to a larger overall BOT deficit. Therefore, a devaluation of the currency is unlikely to immediately improve the BOT for a country in deficit.

The Immediate Impact on the Balance of Trade (BOT) for a Country