JNU QSTNN 2013 PLSSSS HELP!!!

[tania]

If an economy is price taker in world markets for both export and import , the real exchange rate devaluation
1. will have no effect on balance of trade
2. will cause balance of trade to improve
3. will cause balance of trade to deteriorate
4. will turn trade deficit into a balance

please explain the answer

Thanks.

[unsullised]

3.
imports become expensive while exports have no effect.

[tania]

shunt it be 2.
if devaluation will happen , export will improve and imports will go down leading to improvement !!?

[unsullised]

You assume that quantity of exports and imports remain constant. Only the currency valuation changes. Do you have the official answer?

[tania]

the official answer is even more puzzling .
its a.no change !
but why will we assume the quantity of exp n imps constant ?

[unsullised]

My bad, that's actually the correct answer.

Assume,
quantity of exports X = 10 units @ $2
quantity of imports M = 5 units @ $3

initial exchange rate, $1 = 10 rupees
Final exchange rate, $1 = 20 R
BOT ($1=10R) = $-5
BOT ($1=20R) = $-5

I initially believed that balance of trade is in terms of local currency but is actually calculated in terms of globally accepted trade currency.

[tania]

BUT Y ARE WE ASSUMING THE EXPORTS AND IMPORTS TO BE CONSTANT?