Furthermore, it provides an analysis of how the issue of devaluation affects the balance of trade in relation to the elasticity of supply and demand for foreign exchange and foreign goods in the concerned market (Melvin and Norrbin 226).The devaluation of a country’s currency domestically normally raises the price of foreign goods in relation to the domestic goods within that country. With the increase in prices of foreign goods, the total payments to importers either rise or decrease depending on the elasticity of demand for the imports. Devaluation conventionally is allegedly believed to be a mode that can be used to increase the country’s balance of trade. Devaluation leads to a phenomenon referred to as the J-curve effect, which can be described as the pattern of the balance of trade that is formed as a result of the devaluation of a country’s currency. Through the J-curve effect, an explanation can arrive at that when the devaluation increases the price of imports relative to the domestic goods of the country and decreases the price of domestic goods relative to the foreign buyers, it causes a short-run period during which the balance of trade falls. Devaluation leads to two periods: the pass-through analysis and the current contract period. The currency contract period refers to a situation just after devaluation when the contracts that had initially been negotiated upon becoming revalued. In the pass-through analysis period, the traders have a small effect to the changes regarding the response of new prices that have been set, although eventually, the response to these changes becomes effectively complete (Melvin and Norrbin, 237).The IS-LM-BP approach refers to a situation where goods market equilibrium, money market equilibrium, and the balance of payment equilibrium are determined by three factors the IS curve, LM curve and the BP curve. In IS curve, the equilibrium is determined when the output of goods and services supplied equals the quantity of goods and services demanded.
Work CitedMelvin, Michael and Stefan C. Norrbin. International Money and Finance. Oxford: Academic Press, 2013
Please type your essay title, choose your document type, enter your email and we send you essay samples