Exchange Rate Impact on Import and Export Dynamics
1. Revaluation Effects on Imports:
An imported good’s price (Pi) is determined by the exchange rate (tc) multiplied by the foreign price (Pe): Pi = tc * Pe. The autarky price is Pa. When Pi < Pa, demand exceeds supply (qd > qo), resulting in imports (qd – qo). A revaluation decreases tc, lowering Pi. This increases demand and decreases supply, leading to qd’ > qo’, and thus increased imports (qd’ – qo’ > qd – qo). Therefore, the initial conclusion that revaluation decreases imports is invalid.
2. Depreciation Effects on Exports:
An exportable good’s price (Pi) is determined by Pi = tc * Pe > Pa. When Pi > Pa, supply exceeds demand (q > qd), resulting in exports (q – qd). A depreciation increases tc, raising Pi. This increases supply and decreases demand, maintaining q > qd. Therefore, the good remains exportable, and the initial conclusion that depreciation makes exportable goods importable is invalid.
3. Revaluation Effects on Exports:
An exportable good’s price (Pi) is determined by Pi = tc * Pe > Pa. When Pi > Pa, supply exceeds demand (q > qd), resulting in exports (q – qd). A revaluation decreases tc, lowering Pi. This can lead to three scenarios:
- Scenario 1: Pi decreases but remains above Pa (Pi’ > Pa). Supply still exceeds demand (qo’ > qd’), and the good remains exportable. The initial conclusion is invalid.
- Scenario 2: Pi decreases to equal Pa (Pi = Pa). Supply equals demand (q = qd), resulting in neither imports nor exports. The initial conclusion is invalid.
- Scenario 3: Pi decreases below Pa (Pi”’ < Pa). Demand exceeds supply (qd”’ > q”’), resulting in imports (qd”’ – q”’). In this case, the conclusion that revaluation can make exportable goods importable is valid.