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JAMB Economics 2003 Question 36

Question 36

Balance of Payments and Exchange Rates

The effectiveness of devaluation as a solution to a balance of payments problem depends on the

  1. A.value of visible and invisible goods
  2. B.value of invisible items of both domestic and foreign trades
  3. C.relative elasticities of demand and supply of imports and exports
  4. D.foreign investments of businessmen
Show the answer and explanation

Answer: C (relative elasticities of demand and supply of imports and exports)

Explanation

Devaluation works only if demand for exports and imports is elastic enough for the price changes to raise export earnings and cut import spending.