Assume a Two-Country World Containing Country a (Whose Currency Is

question 8

Essay

Assume a two-country world containing country A (whose currency is the dollar) and country B (whose currency is the peso). In this context, and using relevant graphs, explain how a depreciation of the dollar against the peso (for example, a 10% depreciation) conceptually affects the quantity of A's exports to B and the quantity of A's imports from B. (You can use either dollars or pesos on the vertical axes of your graphs. Also, assume that "pass-through" is complete.) Then carefully explain why economists say that such a depreciation could actually worsen the trade balance (or current account balance) of country A and indicate the Marshall-Lerner condition. Finally, define the "J curve" and give a very brief explanation of why it has the shape that it does.

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Definitions:

Superposition

A principle in physics that for any two overlapping waves, the resulting wave is obtained by adding the amplitudes of the individual waves at each point.

Convergence

The process by which lines of perspective in a drawing or photograph appear to converge as they recede toward the horizon line, creating the illusion of depth. In a biological context, it refers to the evolution of similar features in species of different lineages.

Shadowing

A technique used in language learning and cognitive psychology where an individual repeats speech immediately after hearing it, focusing on mimicry and comprehension.

Depth Perception

The visual ability to perceive the world in three dimensions and the distance of an object.