Question on: JAMB Economics - 2003
The effectiveness of devaluation as a solution to a balance of payments problem depends on the
A
value of visible and invisible goods
B
value of invisible items of both domestic and foreign trades
C
relative elasticities of demand and supply of imports and exports
D
foreign investments of businessmen
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Correct Option: C
The effectiveness of devaluation in addressing a balance of payments problem hinges primarily on the price elasticities of demand and supply for imports and exports.
* **Elasticities:** If demand for exports is elastic (meaning a price decrease leads to a proportionally larger increase in quantity demanded), and demand for imports is inelastic (meaning a price increase leads to a proportionally smaller decrease in quantity demanded), devaluation can improve the balance of payments.
* **Marshall-Lerner Condition:** This condition states that devaluation will improve the balance of payments if the sum of the price elasticities of demand for exports and imports is greater than one.
Other options are incorrect because:
* **A & B:** While the value of visible and invisible goods and items of trade are relevant to balance of payments, they do not determine whether devaluation will be effective.
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