Problem 3.22: Trade Deficits and J-curve Adjustment Path 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 cost is ($880) and the pst-devaluation trade balance is ($1398)

Explanation:

Assumptions Values

Initial spot exchange rate, $/fc $2.00

Price of exports, dollars ($) * 20.0000

Price of imports, foreign currency (fc) * 12.0000

Quantity of exports, units * 100

Quantity of imports, units * 120

Percentage devaluation of the dollar 18.00%

Price elasticity of demand, imports * (0.900)

a. The pre-devaluation trade balance--

Revenues from exports, $ $2,000

Expenditures on imports, fc * 1,440

Expenditures on imports, $ $2,880

Pre-devaluation trade balance ($880)

b. Resulting trade balance immediately after devaluation

Revenues from exports, $ $2,000

Expenditures on imports, fc * 1,440

New spot exchange rate, after devaluation $2.36

Expenditures on imports, $ $3,398

Post-devaluation trade balance (currency contract period) ($1,398)