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“If the country has a higher rate of inflation than its major trading partners, its exports will become relatively expensive and imports relatively cheap.”
I don’t understand that why imports will be cheap. Anyone can help me explain with example?
Thanks.
Inflation means higher prices, means value of money is decreasing..
e.g. Your country can produce a cellphone for $10 in your country, and inflation in your country is high!!
And china can produce same mobile in $7, and can sell your country for $8.Actually, if an exporting country has a higher rate of inflation than an importing country, its exports will not become relatively expensive for the importer. High inflation implies that your currency is becoming worth less (what you could buy for 10 this year might take 12 next). This should affect the exchange rate between the two countries through the idea of purchasing power parity so that it will not affect the price to people in the importing country.
@cuteleo110…thank you for your example.
@gromit……thank you for your explanation. Importing products will be expensive for the country which has higher inflation because of exchange rate. Right? If it is right, the sentence ” imports will become relatively cheap” is wrong. Hope your reply.Thanks.
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the prices of imports will be chreaper because of the fact that in their home country, there is a high rate of inflation and the prices of exports eill be expensive. the prices will rise because of inflation and people will now switch to importing their goods…………:)
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