Answer to Question #199645 in Macroeconomics for Joseph

Question

Suppose the € nominally depreciates against the $. How do the terms of trade evolve?

What are the implications?

Answer 1

Terms of trade refer to measure of country's export prices to import prices. The terms of trade will evolve by dividing the price of exports by price of imports to get the ration. The exchange rates are then quoted as relative prices.

When the country's currency depreciate the price of foreign goods rise relative to domestic goods. The country then will be forced to lower the volume of imports as it increases volume of export.