Depreciation and the Trade Balance (Evaluation Skills Video)

Here is a short video looking at how students might use the phrase "it depends on" as part of evaluating an A level economics essay question. The question chosen was "To what extent will a depreciation of the exchange rate lead to an improved trade balance?"

Core Notes:

A depreciation can make exports cheaper when priced in another currency. This will increase demand.

Eval: This depends on the coefficient of price elasticity of demand for exports in overseas markets. Ped may be low (<1) limiting the effect

Imports become more expensive in domestic markets possibly causing expenditure switching effects

Eval: This depends on the supply-side capacity of domestic firms to take advantage of higher demand. Their short run PES may be low (Pes<1).

A fall in the exchange rate makes it more profitable for export industries to sell overseas. They will lift their investment to take advantage.

Eval: This depends on whether businesses forecast the increase in export sales will be sustained. The currency depreciation may only be temporary