How will a real exchange rate devaluation affect Balance of Trade, if an economy is a price taker in world markets for both export and import?

If a country is price-taker then it faces a vertical demand curve at the world price. Now after devaluation, exporters would get more in domestic currency so they will increase exports. The net result is increase in both volume and average price of exports, thus revenue from exports increases.

Similarly, the importers are facing a higher price and even after they reduce their demand world price won’t change. Here it gets tricky, the quantity consumed has fallen but price has risen. Now what happens to spending on imports depend on elasticity of demand curve for imports. However, the maximum percent increase in spending on imports is equal to absolute value of percent change in currency (assuming perfectly inelastic which makes negative quantity effect zero).

If the curve is elastic, spending on imports would decline, i.e., percent change is negative. Percent change in export revenue = |percent currency change| + (positive quantity effect). Starting from a balanced trade or a trade surplus, there will be an increment in trade surplus.

However, starting from large trade deficits, the answer is indeterminate as even though percent change in imports is always less than exports, but in absolute value it could be more as initially import>>export.

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