Answer to Question #188415 in Macroeconomics for anonymous

Question

Four days after US President Donald Trump threatened to impose 10% tariffs on $300 billion in Chinese imports, China decided to let its currency yuan fall to an eleven-year low below 7 per dollar on Monday. This is not the first time China has resorted to currency devaluation. In 2015, People's Bank of China devalued its currency to its lowest rate against the US dollar in three years. Question: Explain how the devaluation of currency may help improve China’s balance of payment. If the elasticity of demand for import for China is o.6 and the elasticity of demand for exports is 0.9, do you think China’s BOP situation will improve because of devaluation? Explain your answer.

Answer 1

Devaluing the home currency can help correct balance of payments and reduce these deficits. Exports will increase and imports will decrease due to exports becoming cheaper and imports more expensive. This favors an improved balance of payments as exports increase and imports decrease, shrinking trade deficits.

If the elasticity of demand for import for China is 0.6 and the elasticity of demand for exports is 0.9, then the demand for exports is more elastic and China’s BOP situation will improve because of devaluation.