Consider the following statements:
Statement-I: A lower exchange rate can be expected to improve the balance of trade.
Statement-II: The country earns less from its exports and spends more on its imports due to the lower exchange rate.

Which one of the following is correct in respect of the above statements?
(a) Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I.
(b) Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-I.
(c) Statement-I is correct but Statement-II is incorrect.
(d) Statement-I is incorrect but Statement-II is correct.

Question

Consider the following statements:
Statement-I: A lower exchange rate can be expected to improve the balance of trade.
Statement-II: The country earns less from its exports and spends more on its imports due to the lower exchange rate.

Which one of the following is correct in respect of the above statements?
(a) Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I.
(b) Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-I.
(c) Statement-I is correct but Statement-II is incorrect.
(d) Statement-I is incorrect but Statement-II is correct.

TutorArc · Accepted Answer

Statement-I is correct: A lower exchange rate makes a country's exports cheaper in foreign markets and imports costlier domestically. This often leads to higher exports and lower imports, thereby improving the balance of trade.

Statement-II is not correct: A lower exchange rate makes imports more expensive, which discourages import spending, and makes exports more competitive in global markets, potentially increasing export volumes&mdash;even if the per-unit earning in foreign currency is lower.

International Trade

Exchange Rates and Balance of Trade

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M Question 1	⏱ 0
Consider the following statements: Statement-I: A lower exchange rate can be expected to improve the balance of trade. Statement-II: The country earns less from its exports and spends more on its imports due to the lower exchange rate. Which one of the following is correct in respect of the above statements? (a) Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I. (b) Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-I. (c) Statement-I is correct but Statement-II is incorrect. (d) Statement-I is incorrect but Statement-II is correct.

International Trade

Exchange Rates and Balance of Trade

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