The elasticities approach to the balance of trade is concerned with how:
A) Currency pegs alter the market for imports and exports.
B) Government deficits influence the balance of trade.
C) The balance of trade is altered by changing relative prices of domestic and foreign goods.
D) The ratio of domestic spending to domestic production influences the balance of trade.

Question

Quizplus · Accepted Answer

The elasticities approach to the balance of trade focuses on how changes in relative prices of domestic and foreign goods affect the balance of trade. Specifically, if the price of domestic goods rises relative to foreign goods, there will be a decrease in demand for domestic goods and an increase in demand for foreign goods, leading to a deterioration in the balance of trade. Alternately, if the price of domestic goods falls relative to foreign goods, there will be an increase in demand for domestic goods and a decrease in demand for foreign goods, leading to an improvement in the balance of trade.

The Elasticities Approach to the Balance of Trade Is Concerned