Impact of exchange rates on balance of payments Flashcards
How does depreciation affect exports and imports generally?
By changing relative prices (SPICED)
What is the impact of depreciation on imports?
Priced in £ are more expensive therefore imports falls
What does the extent that imports fall due to depreciation depend on?
PED
What happens to imports prices if they are price elastic?
total £ value of imports falls
What happens to imports prices if they are price inelastic?
total £ value of imports rises
What is the impact of depreciation on exports?
£ of price of exports unchanged but foreign currency price lower therefore export levels rise
What does the extent that exports rise due to depreciation depend on?
PED
What happens to the value of exports due to depreciation?
Total £ value of exports rises
What is the Marshall Lerner condition?
Depreciation will lead to an improvement in the current account so long as the combined price elasticities of exports and imports are greater than 1
What is the J curve effect?
In the short term, depreciation is likely to lead to deterioration in the current account position before it starts to improve.
What happens to import values and the current account when in the short run PED for imports is inelastic?
Import values rise therefore there is a deterioration in the current account
What happens to export values when in the short run PED for exports is inelastic?
Export values unchanged
What happens to import values and the current account when in the long run PED for imports is more elastic?
Import values might fall
Improvement in current account position
What happens to export values when in the long run PED for exports is more elastic?
Export values rise
