Explain why a depreciation of the exchange rate increases the trade balance, while an increase of income reduces trade balance

Finance Jan 15, 2021

Expert Solution

Depreciation of the exchange rate will be increasing the trade balance because when the domestic country currency is depreciated, it will be leading to increase in the export and it will also lead to decrease in the import so it will be creating a higher amount of trade account surplus which is leading to increasing of the trade balance of the country.

Increase of the income is reducing the trade balance because it is leading to appreciation of the currency and it will also lead to increase in the imports from the other country and decrease in the exports, so it will be leading to a higher amount of trade deficit.

Hence the given statement is correct.

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