Chapter 18.2, Problem 2R

To determine

To evaluate how exchange rate affect the balance of trade.

Explanation of Solution

The rate of exchange is the currency value of one country to that of another country or economic zone. Many currencies are free-floating and can rise or fall depending on market supply and demand. Some currencies do not float freely, and have limits. To show how exchange rate affect balance of trade let take an example Firstly, currency depreciation (devaluation) raises the volume of exports and decreases the volume of imports, all of which have a beneficial effect on the trade balance, that is, they can decrease the trade deficit or raise the trade surplus.

Depreciation of currency

→

Raises the volume of export

→

Have positive results on the balance of trade.

Economics Concept Introduction

Introduction: The trade balance also called the trade balance, it is differences of the value of monetary of its imports and exports of a country for a particular period . A good trade balance shows a surplus trade and shows a trade deficit while a trade balance is negative . The BOT is an important component in determining the current account for a nation.