If the sum of absolute values of the elasticities of demand for imports and demand for exports is greater than one,a currency devaluation could:
A) Improve the balance of trade
B) Further damage the balance of trade
C) Restore balance of trade equilibrium
D) Nothing can be determined with the given information.

Question

Quizplus · Accepted Answer

A currency devaluation would make imports more expensive and exports cheaper, leading to an increase in export demand and a decrease in import demand. If the sum of absolute values of the elasticities of demand for imports and demand for exports is greater than one, it means that the combined effect on the balance of trade will be positive, i.e., an increase in export demand will more than offset the decrease in import demand, improving the balance of trade. Therefore, a currency devaluation could improve the balance of trade in this scenario.

If the Sum of Absolute Values of the Elasticities of Demand