international economics concepts
DESCRIPTION
This map graphically illustrates the relationship between the concepts of elasticity, exchange rates, balance of payments and terms of trade.TRANSCRIPT
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 -