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country H is a major importer of goods and services with a demand curve that is price inelastic. Demand for its exports is unaffected by any exchange rate changes. At the present time it has a balance of payments surplus. What is the effect on the balance of payments if the value of the currency for Country H strengthens against those of its trading partners?
A. The surplus improves
B. There is no change in balance of payments situation
C. A balance of payments equilibrium is achieved
D. The surplus deteriorates
what do you think?B. There is no change is balance of payments situation..
Demand curve is price inelastic and Demand for its exports is unaffected by any exchange rate changes.
In normal condition $1= Rs.100
When currency strengthens , $1= Rs.90There is no change in export and import.. so change will be set off with import and export also.. as H pays Rs.90 and recieves same Rs.90.
If the currency strengthens, usually their demand for exports falls due to increase of price; however, the question states that demand is unchanged.
If the currency strengthens, imports will be cheaper. Demand is said to be inelastic with price, meaning demand will be unaffected by price.
I still think it’s A.
I think the answer is A for the same reasons as given above.
(For cuteleo to be correct, both imports and exports would have to be invoiced in the same currency)
I don’t know where the question comes from, but it is a bit of a daft one – in real life, the chances of an inelastic demand curve and demand for exports being unchanged is pretty unlikely!! 🙂
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