Reference no: EM133065878

Balance of trade is the difference between the value of a country exports and the value of its imports. Inflation is likely to worsen the balance of trade. If a country suffers relatively high inflation, its exports will become less competitive in the world markets. At the same time imports will become relatively cheaper than home-produced goods. Thus exports will decrease and imports will rise, deteriorating the balance of trade.

Argue the point that a trade deficit reversal is typically driven by a significant real exchange rate depreciation.