Model answer for Business Environement and Economics - Essay Example

Thus, there is a rise in the aggregate demand for exports from the nation. On the contrary, the demand for imports also falls due to a higher value of foreign currencies. However, there are adverse implications of a falling exchange rate value as well. It discourages overseas investors from pouring their resources in a nation whose domestic currency bears a poorer value than that of the home country. This will imply a fall in the aggregate amount of investments and thus a negative influence on the gross income of the concerned nation.

Nevertheless, this is compensated through a rise in export balances as well, so that the impact on the aggregate income of the nation is almost negligible. Moreover, a gradual rise in the income level establishes the rate of exchange at the previous level and thus, wins back the faith of the overseas investors once again, so that the nation is shoved to a path of economic growth and the national business houses experience prosperity once again. Speaking in terms of comparative advantage principals, suppose there are two nations, A and B, with each of them endowed with resources capable of producing two goods, X and Y.

according to the principal, if A can produce X at cheaper expenses than B, then, A must concentrate on producing X only, while B should produce Y. The amounts of X and Y that each of them need would be traded between them so as to produce a mutually beneficial situation through increased income levels. The situation could be encompassed through the inequation, PXA/ PYA < PXB/ PYB, i.e., PXA/ PXB < PYA/ PYB. If currency of A devalues, it implies that both PXA and PYA should fall, compared to those in B, which need not maintain the inequations.

In fact, it might be revealed that the relative prices of both X and Y is lower in A than in B due to cheaper production costs. Hence, demand for Y from B would shift to A; A now supplies both X and Y, which are imported by B. B in turn needs to open up other income