If ‘A’ and ‘B’ are the price elasticity of demand for import and export respectively then when does devaluation helps to improve current account balance.

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justaguide | College Teacher | (Level 2) Distinguished Educator

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The price elasticity of demand is defined as the unit change in demand for a unit change in price. If price elasticity of demand is high a small increase in price can decrease demand by a large extent while a small decrease in price can increase demand substantially.

Devaluation of currency makes the currency cheaper with respect to other currencies. This makes imported products and services, which are priced in more expensive currencies, costlier for domestic consumers. Goods and services that are being exported are now cheaper for foreign customers as they can buy more units of the devalued currency with the same amount in terms of their currency. For currency devaluation to benefit the current account balance the price elasticity of demand of imports as well as exports should be high. If the price elasticity of demand of imports (A) is low there is a small decrease in imports with devaluation; on the other hand a low price elasticity of demand of exports (B) will not increase exports significantly in spite of the currency being devalued.

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