This will cause an improvementin current account + BoP if M

spending and X revenuewill occur if D is inelastic

General elasticity

For Inelastic Demand P= TR, P= TR

For Elastic Demand P= TR, P= TR

Effects of depreciation on BoP

Depreciation = deterioration of BoP

M spending and/or X

revenue when D for X and Mis inelastic

Appreciation

Value of domestic currency

M less expensive (P )Inelastic D = P = M spending

Elastic D = P = M spending

X more expensive (P )Inelastic D = P = M revenue

Elastic D = P = X revenue

Effects on ToT and BoP

total M spending

total X revenue

Depreciation

Elastic D causes M spending

Elastic D causes X revenue

1. Depreciation orDevaluation

value of domestic currency

Result on M

Foreign currency more

expensive = M

Result on X

Easier for foreigners to buy

domestic currency = X

Will total spending on M or ?If M elastic demandP= TR

If M inelastic demandP= TR

Will total X revenue or ?If X elastic demandP= TR

If X inelastic demandP= TR

Therefore

It is possible that animprovement in the ToT canlead to a deterioration of theBoP IF: D for X and M are elastic

D for X and M are

Eco SL MMAP Firas A..mmap - 26.08.2008 -