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 trade balance between the two countries ?

Answer 1

If inflation is higher in country A than in country B, and the exchange rate between the two countries is fixed, the trade balance of country A will be deficit while that of country B will be surplus. In case of inflation in country A and prices of country B remaining constant, imports of country A will rise or exports of country A will decline. As a result, trade balance of country A will be unfavourable and trade balance of country B will be favourable.

Comments

Why will the imports of country A will rise? Plz explain .

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If we see there is inflation in country A , it means
Value of country A's currency is less and it mesns devaluation. And in the case of devaluation. Exports rise rather than imports .