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If Inflation is Higher in Country a than in Country B, and the Exchange Rate Between the Two Countries is Fixed, What is Likely to Happen to the Trade Balance Between the Two - Economics

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ConceptForeign Exchange Market Foreign Exchange Rate

Question

If inflation is higher in country A than in Country B, and the exchange rate between the two countries is fixed, what is likely to happen to the trade balance between the two countries?

Solution

Country A has a higher inflation than country B. Since, the exchange rate is fixed, it is advantageous for country B to export goods to country A. Similarly, it is advantageous for country A to import goods from country B. On the other hand, it would be expensive for country A to export goods to country B. Thus, country A will have trade deficit as it will import more goods as compared to exports, from country B. Country B will import less goods as compared to exports, from country A. Hence, there is a trade surplus in country B.

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 NCERT Solution for Class 12 Economics - Introductory Macroeconomics (2014 to Current)
Chapter 6: Open Economy Macroeconomics
Exercise | Q: 16 | Page no. 101
Solution If Inflation is Higher in Country a than in Country B, and the Exchange Rate Between the Two Countries is Fixed, What is Likely to Happen to the Trade Balance Between the Two Concept: Foreign Exchange Market - Foreign Exchange Rate.
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