1.

Explain the effect of fall in foreign exchange rate on (a) balance of trade and (b) GDP.

Answer»

SOLUTION :(a) Fall in foreignexchange rate makesimportscheaperand exportscostlier . This will increasedemand forimportsand reduce DEMAND for EXPORTS.This will have negative effect on balance of TRADE.
(b) Since fall in exchange rate reducesexports and increases IMPORTS, ithas a negative effect on GDP. Through the expenditure method of GDP, rise in imports and fall in exports both reduce GDP.


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