1.

Depreciation or
General elasticity
Devaluation

Foreign currency more For Inelastic Demand P= TR, P= TR

expensive = M Result on M
For Elastic Demand P= TR, P= TR
value of domestic currency
Easier for foreigners to buy
domestic currency = X Result on X Effects of depreciation on BoP

P= TR Depreciation = deterioration of BoP

If M elastic demand
Will total spending on M or ? M spending and/or X
P= TR If M inelastic demand revenue when D for X and M
is inelastic
P= TR If X elastic demand Appreciation
Will total X revenue or ?
P= TR If X inelastic demand Value of domestic currency

Inelastic D = P = M spending
M less expensive (P )
Elastic D = P = M spending
Depreciation Inelastic D = P = M revenue
X more expensive (P )
Elastic D causes M spending Elastic D = P = X revenue

Elastic D causes X revenue

This will cause an improvement
Effects on ToT and BoP in current account + BoP if M
spending and X revenue
total M spending will occur if D is inelastic
total X revenue

Therefore

It is possible that an
improvement in the ToT can
lead to a deterioration of the
BoP IF: D for X and M are elastic
D for X and M are

Eco SL MMAP Firas A..mmap - 26.08.2008 -