Assume the United States has the following import/export volumes and prices. It undertakes a major "devaluation" of the dollar, say 18% on average against all major trading partner currencies. What is the pre-devaluation and post-devaluation trade balance

The pre-devaluation trade balance is - $880 while the post-devaluation trade balance is - $1,398.4.

Step-by-step Explanation:

Step 1: Value Assumptions

Assuming the following import/export volumes and prices:

Initial spot exchange rate ($/fc) 2

Price of exports, dollars 20

Price of imports, foreign currency (fc) 12

Quantity of exports, units 100

Quantity of imports, units 120

Percentage devaluation of the dollar 18%

Price elasticity of demand, imports - 0.9

Step 2: Calculation of Pre-Devaluation Trade Balance

Revenue from exports = Quantity of exports x Price of exports

= 100 x $20

= $2,000

Expenditure on imports = Quantity of imports x Price of imports x Initial spot exchange rate

= 120 x $12 x 2

= $2,880

Pre-devaluation trade balance = Revenue from exports - Expenditure on imports

= $2,000 - $2,880

= - $880

Step 3: Calculation of Post-Devaluation Trade Balance

Revenue from exports = Quantity of exports x Price of exports

= 100 x $20

= $2,000

Expenditure on imports = Quantity of imports x Price of imports x New spot exchange rate

= 120 x $12 x 2 (1.18)

= $3,398.4

Post-devaluation trade balance = Revenue from exports - Expenditure on imports

= $2,000 - $3,398.4

= - $1,398.4