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Impact of Foreign Exchange Rate Fall on Current Account Deficit

Question

Analyse how a fall in a country’s foreign exchange rate could reduce a deficit on the current account of its balance of payments.

Category:

International Trade and Exchange Rates

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Preview Answer

I. 🍃Introduction
- Definition of deficit and its impact on the balance of payments
- Explanation of how a fall in the exchange rate can affect the deficit

II. Depreciation/Devaluation
- Definition of depreciation/devaluation
- How it reduces the price of exports and increases the price of imports
- Impact on competitiveness of exports and imports
- How it can lead to an increase in demand for exports and a decrease in demand for imports

III. Increase in Export Revenue
- Explanation of how an increase in demand for exports can lead to an increase in export revenue
- How this can lead to an increase in money flowing into the country

IV. Reduction in Import Expenditure
- Explanation of how a decrease in demand for imports can lead to a reduction in import expenditure
- How this can lead to a reduction in money flowing out of the country
- How it can lead to a switch from imports to domestically produced products

V. Increase in Net Exports
- Explanation of how an increase in export revenue and a decrease in import expenditure can lead to an increase in net exports
- Importance of price elasticity of demand in determining the impact on net exports

VI. Increase in Secondary Income
- Explanation of how an increase in the value of remittances can lead to an increase in secondary income
- Importance of secondary income in reducing the deficit

VII. 👉Conclusion
- Summary of the main points
- Importance of exchange rate policy in reducing the deficit.

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