d) Assume that at a pre-depreciation of the rand against the U.S. dollar, South Africa (S.A.) exports 500
units to and imports 700 units from the U.S. (You do not need to know the actual prices of imports and
exports, but assume that the trade or current account is initially balanced.) Suppose now there is a 15%
appreciation of the U.S. dollar against the rand and that because of the domestic currency depreciation,
exports rise to 550 units and imports fall to 630 units. [Assume that the prices of imported goods are
denominated in foreign currency and the prices of exported goods are denominated in domestic currency.]
(i)
Calculate the home-country price elasticity of demand for imports. [Show formula and round
off your solution to a maximum of TWO decimal places.]
[4]
(ii) Calculate the percentage depreciation of the domestic currency against the foreign currency.
[Show formula - you need not derive the formula - and round off your solution to a maximum
of TWO decimal places.]
[4]
(iii) Now using the export volume statistics, and your solution in (ii) above, calculate the price
elasticity of demand for home-country exports.
[5]
(iv) Would the simple Marshall-Lerner condition suggest that South Africa's trade (or current
account) balance has improved or deteriorated because of this depreciation of its currency? Why?
[Your answer should include the calculations and round off your solution to TWO decimal
places.]
[3]