Answer to Question #297282 in Microeconomics for Abdoskid

Question

How concept of elasticity help in correcting balance of payments

Answer 1

The elasticity approach to the balance of payments demonstrates how the change in the value of the currency affects a country's balance of payments.

The elasticity technique attempts to forecast the impact of policy changes on the balance of payments. This method, for example, shows how exchange rates will effect the balance. Furthermore, the elasticity approach argues that devaluation can enhance the balance of payments if the BOP is in equilibrium. However, in order for devaluation to work, the overall price elasticity of local and international demand for imports must rise. When a country devalues its currency, the balance of payments improves under ideal circumstances. The Marshall-Lerner condition describes this ideal state.