What is the pre-devaluation trade balance

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Reference no: EM133378779

Question: Snowland, a small open-economy country, has the following import/export volumes and prices. As it runs a trade deficit, it undertakes a major "devaluation" of its currency, say 25% on average against its all major trading partners currencies. What are Snowland's trade balances during the pre-devaluation period, the post-devaluation - immediately after devaluation period, and the post-devaluation - quantity adjustment period, respectively? (Please note that fc = foreign currency)

Initial spot exchange rate ($/fc) = $3.00/fc

Price of exports, dollars = $25.00 per unit

Price of imports, fc = fc15.00 per unit

Quantity of exports, units = 100 units

Quantity of imports, units = 120

Percentage devaluation of the dollar = -25%

Price elasticity of demand for imports = -0.80

a) What is the pre-devaluation trade balance?

b) What is the trade balance immediately after devaluation? (the new exchange rate)

c) What is the trade balance during the post-devaluation - quantity adjustment period? (new imports)

d) In addition to changes in imports in c), exports may also change: Snowland's exports have a price elasticity of demand is -0.9, what is the trade balance during the post-devaluation - quantity adjustment period (using the the same imports from Part c) but calculate new exports)?

Reference no: EM133378779

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