Multiple choice

Devaluation, other things remaining the same will make the balance of payments of a country worse if the elasticity of exports and elasticity of Imports of a developing country will be:

  1. greater than 1

  2. less than 1

  3. equal to 1

  4. none of these

Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Devaluation worsens the balance of payments when the Marshall-Lerner condition is not satisfied - i.e., when the sum of export and import demand elasticities is less than 1 (both individually less than 1 in this case). Low elasticity means devaluation increases import expenditure more than export revenue, deteriorating the trade balance. This is common for developing countries trading in essential goods.