How can a depreciation in the home currency impact the trade balance?

The trade balance is defined by the difference in value of exports minus imports. Now a depreciation in a the home currency means it that one unit of foreign currency (lets say $) can now purchase more £'s and consequently £1 now is worth less in $.It follows that since $1 can purchase more £'s, exports are more attractive to foreign consumers, thus more exports are purchased. Similarly, since £1 can now purchase less in terms of $'s, imports are less attractive and more expensive to domestic consumers thus less are purchased. It follows that the value of exports have increased, and the value of imports decreased leading to an improvement in the trade balance.

Answered by Lewis J. Economics tutor

933 Views

See similar Economics A Level tutors

Related Economics A Level answers

All answers ▸

What is a negative externality and how can it be corrected?


Explain how a public good is different to a private good.


I have revised all the content for Economics but my essays are not reaching the top level, what can I do to ensure I get the highest marks?


Why does the price elasticity of demand (PED) of a product change at different levels of production?


We're here to help

contact us iconContact usWhatsapp logoMessage us on Whatsapptelephone icon+44 (0) 203 773 6020
Facebook logoInstagram logoLinkedIn logo
Cookie Preferences