Nigeria faces the price elasticities of demand for its imports and exports of -.4 and -.3,...

Nigeria faces the price elasticities of demand for its imports and exports of -.4 and -.3, respectively. Analyze how its current account will be influenced by a devaluation of the naira by 10%. If policy makers wish to have an improvement of the current account, what should they do?

Expert Solution

Naira is the currency of Nigeria. If the naira is devalued, it will mean that the value of nigeria's currency will be lower in the forex market. This will also mean that the exports of Nigeria to other countries will cost less to the buyers than before. This will directly influence exports to turn positive. Also, since the naira has been devalued, the imports from other countries will cost a lot more to Nigerians. Thus, the quantum of imports will reduce. Overall, this will provide impetus to the home sector to export and reduce imports thus making the country more sustainable.

To improve the current account, this method of devaluation will work if the domestic sector can increase capacity and capability to meet the needs of the country. If they fail, the country will have to keep importing and the import bill will rise drastically due to the devaluation and further dampen the current account.

jeff jeffy answered 1 year ago

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