Question

Urgent!!!!!! Suppose the quality of Hong Kong products relative to foreign products deteriorates.

a. Explain how the quality deterioration of Hong Kong products affects Hong Kong’s exports at any given exchange rate.

b. Explain how the quality deterioration of Hong Kong products affects Hong Kong’s real exchange rate and trade balance.

c. Is it possible that the quality deterioration of Hong Kong products increases Hong Kong’s trade deficit?

Answer 1

A) As quality of HK products deteriorates, demand for its goods will decrease in the foreign markets. This will reduce HK exports, as demand for its products falls, as consumers never prefer buying poor quality products

B) Due to quality deterioration, HK exports fall

Keeping imports unchanged, fall in exports lead to increase in trade deficit. As a result of fall in exports, HK currency demand falls, leading to fall in currency value or exchange rate depreciation. Trade balance will also fall, as export income falls

C) Yes, trade deficit rises as product quality deteriorates. This happens because export income falls while imports remain unchanged.