Question

It has been argued by economists that the depreciation of a home country's currency makes home goods cheaper for foreigners and foreign goods more expensive for domestic residents while the appreciation of a home country's currency makes home goods more expensive for foreigners and foreign goods cheaper for domestic residents. Briefly discuss three (3) determinants of imports and three (3) determinants of exports

(Hint: each determinant should be a sub- heading and your discussion should be maximum 1 page)

Answer 1

Growth in imports happens when-

1. households' disposable income rises (specially if imported products are ‘luxury’ goods, i.e. their demand increases greater than proportionally when income level augments ).
   2. Gross Domestic Product at large rises, where an elasticity of one is usually supposed, so that a rise of five per cent in GDP corresponds to a rise of five per cent in import .
   3.  Inflation level abroad is lesser than domestically, so that international goods become relatively inexpensive.

Export determinants-

1. Level of production-

Its a supply aspect determinant of exports .The greater level of

production is the chief cause of   expansion in exports, as surplus of production   can be

exhausted in foreign markets. In a closed economy surplus in output leads to decline

in prices, which, in turn, leads to pessimism amongst manufacturers. In an open economy these

surpluses create international reserves thru exporting production. Thus we expect the positive

effect of Gross Domestic Product on exports growth.

2.Production Growth -

Growth of the Gross Domestic Product is a pointer   of future potential & sustainability of

level of production. Growth is a more sound determinant as compared to Gross Domestic Product

as it gauges the sustainability of output levels. Thus, we expect positive effect of

GDP growth on expansion of exports.

3.Actual Rate of exchange -

A fall in the comparative domestic price levels on account of exchange rate devaluation   makes

exports inexpensive in foreign markets outcoming in augmented demand for exports,

thus we expect the positive effect of actual exchange rate on growth of exports.