Question

The price elasticity of demand for Canadian imports is 1.2, and the price elasticity of demand for Canadian exports is 1.8. What is the net effect on Canada's trade balance when the Canadian dollar depreciates by 10%? (It would be a good idea to save the answer, you may need it later)

		The trade balance improves by 16% because the inflows fall 12% and the outflows rise 4%
		The trade balance improves by 20% because the inflows fall 2% and the outflows rise 18%
		The trade balance improves by 16% because the inflows fall 2% and the outflows rise 18%
		The trade balance improves by 18% because outflows rise by 18%
		The trade balance improves by 18% because the inflows fall 2% and the outflows rise 18%

The price elasticity of demand for Canadian imports is 1.2, and the price elasticity of demand for Canadian exports is 1.8. What is the net effect on Canadian outpayments (outflows) when the Canadian dollar depreciates by 10%? (It would be a good idea to save the answer, you may need it later)

		Outpayments rise by 18%
		Outpayments fall by 12%
		Outpayments rise by 12%
		Outpayments fall by 18%
		Outpayments fall by 2%

The price elasticity of demand for Canadian imports is 1.2, and the price elasticity of demand for Canadian exports is 1.8. What is the net effect on Canadian inpayments (inflows) when the Canadian dollar depreciates by 10%? (It would be a good idea to save the answer, you may need it later)

		Inpayments fall by 2%
		Inpayments rise by 18%
		Inpayments fall by 12%
		Inpayments rise by 12%
		Inpayments fall by 18%

Answer 1

1> If the Canadian dollar depreciates, Canadian goods become cheaper and thus the export will rise and import will fall.

For export, elasticity is 1.8, so the export will rise 1.8*10% =18%

For import, elasticity is 1.2, so the import will fall 1.2*10% =12%

This results in an improvement of trade balance by 18%-12%=6%

2> Outpayment occurs at the time of import, since import fell by 12%, out payment will fall by 12%

So, the correct option is b

3> Inpayment occurs in the time of export, as export rose by 18%, inpayment will rise by 18%

So, the correct option is b

answered by: anonymous