Question

Government of Afghanistan has called on a conference on “Strategies to reduce Trade Deficit via discouraging Imports”. Kardan University got invitation too from the Ministry and the BBA and BSc Economics Departments has selected you to make a presentation suggesting how currency value can be used to reduce imports. Develop a numerical example explaining if the value of local currency going up how it can effect imports of Afghanistan. Also analyze the long term impact of currency appreciation on the Economy.

Answer 1

Balance of payment is a systematic record of transactions between residents of a country and the rest of the world during any given period. iIn short, it records all imports and exports.

Balance of payment has following accounts: Current, capital, financial and Errors and Omissions.

Under current account following sub accounts are recorded : Goods, services , incomes

To improve balance on current account it is necessary to increase exports and decrease imports. Government of Afghanistan is thinking to appreciate itw oswn currency. Afghan Afghani is a name of currency.

Let us say that $1 = 50 Afghan Afghanis. Now when Afghanistan exports a good worth $1 it receives 50 Afghan Afghanis and has to pay 50 Afghan Afghanis to import worth $1.

If afghanistan revalues its own currency then say $1 = only 40 Afghanis then for each import Afghanistan will pay only 40 Afghan Afghanis and save 10 Afghanis.

However, it will also make exports from Afghanistan expensive and revaluation of currency should be done if its imports will go down but exports are not affected much or else this move will only increase trade deficit for them.

Long term impact will be dependent on amount of import reductio. In my opinion Afghanistan will benefit as its imports are way higher than exports. Afghanistan at the same time should focus on manufacturing and domestic development of goods and services also.