Exchange Rate and Trade Balance
International Journal of Global Business, 7 (1), 59-76, June 2014 59
Examining the Effects of Currency Depreciation on Trade Balance in Selected Asian
Economies
Alemu, Aye Mengistu
Assistant Professor, SolBridge International School of Business, Daejeon, South Korea. ayem2011@solbridge.ac.kr Jin-sang, Lee
Specialist Professor, Duksung Women’s University, Seoul, South Korea. jinslee0209@duksung.ac.kr Abstract
The aim of this study is to investigate how depreciation could affect the export sector in selected
Asian countries. Theoretically, depreciation will bring positive impact on trade balance. However, it is only possible when the sum of the elasticities of demand for export commodities and demand for import goods is greater than unity. Accordingly, this study found no evidence for the effect of depreciation to improve trade balance of about 14 Asian economies. This was perhaps due to the fact that exports did not respond as expected, mainly due to a decline in terms of trade for primary commodities and manufactured products or due to heavy dependence on import goods which may be more expensive in the local currency. As a second approach, we attempted to narrow down the number of countries understudy into 8 countries that are relatively bigger, industrialized and stable, and in this case we found that depreciation improved trade balance.
Keywords: devaluation, trade balance, export, Marshall-Lerner condition, J-curve effect
International Journal of Global Business, 7 (1), 59-76, June 2014 60
Introduction
Theoretically, depreciation of a local currency is good for the export sector, ceteris paribus, it would increase competitiveness of export goods in foreign markets. On the other hand, it would cause higher level of import price. The higher import price could bring inflationary pressure especially those who import a lot of industrial needs, energy resources and consumer goods. Hence, the overall economic impact of depreciation
Examining the Effects of Currency Depreciation on Trade Balance in Selected Asian
Economies
Alemu, Aye Mengistu
Assistant Professor, SolBridge International School of Business, Daejeon, South Korea. ayem2011@solbridge.ac.kr Jin-sang, Lee
Specialist Professor, Duksung Women’s University, Seoul, South Korea. jinslee0209@duksung.ac.kr Abstract
The aim of this study is to investigate how depreciation could affect the export sector in selected
Asian countries. Theoretically, depreciation will bring positive impact on trade balance. However, it is only possible when the sum of the elasticities of demand for export commodities and demand for import goods is greater than unity. Accordingly, this study found no evidence for the effect of depreciation to improve trade balance of about 14 Asian economies. This was perhaps due to the fact that exports did not respond as expected, mainly due to a decline in terms of trade for primary commodities and manufactured products or due to heavy dependence on import goods which may be more expensive in the local currency. As a second approach, we attempted to narrow down the number of countries understudy into 8 countries that are relatively bigger, industrialized and stable, and in this case we found that depreciation improved trade balance.
Keywords: devaluation, trade balance, export, Marshall-Lerner condition, J-curve effect
International Journal of Global Business, 7 (1), 59-76, June 2014 60
Introduction
Theoretically, depreciation of a local currency is good for the export sector, ceteris paribus, it would increase competitiveness of export goods in foreign markets. On the other hand, it would cause higher level of import price. The higher import price could bring inflationary pressure especially those who import a lot of industrial needs, energy resources and consumer goods. Hence, the overall economic impact of depreciation