Assume the United States exports 2,000 computers at a price of $3,000 each and imports 200 UK autos at a price of £10,000 each. Assume that the dollar/pound exchange rate is $2.5 per pound.
Suppose the dollar's exchange value depreciates by 15 percent. Assuming that the price elasticity of demand for U.S. exports equals 0.40 and the price elasticity of demand for U.S. imports equals 0.20, does the dollar depreciation improve or worsen the U.S. trade balance? Why?
Now assume that the price elasticity of demand for U.S. exports equals 2.50 and the price elasticity of demand for U.S. imports equals 1.80. Does this change the outcome? Why?