Devaluation and the balance of payments

Exchange rate £0.50/$1 0.5

Devaluation £0.666/$1 0.667

Before devalation the current account is in balance

Description Volume Price Sterling value Dollar value
UK exports 100 £1.00 £100.00 $200.00
UK imports 40 $5.00 £100.00 $200.00
Current account £0.00 $0.00

Case 1: devaluation leads to a current account deficit

UK exports 105 £1.00 £105.00 $157.50
UK imports 36 $5.00 £120.00 $180.00
Current account -£15.00 -$22.50
� 0.15
_
�_ 0.30
�� 0.45
�_�+�_�

Case 2: devaluation leaves the current account unaffected

UK exports 120 £1.00 £120.00 $179.91
UK imports 36 $5.00 £120.06 $180.00
Current account -£0.06 -$0.09
� 0.60
_�_ 0.30
�
� 0.90
�_�+�_�

Case 3: devaluation leads to a current account surplus

UK exports 130 £1.00 £130.00 $194.90
UK imports 30 $5.00 £100.05 $150.00
Current account £29.95 $44.90
� 0.90
_
�_ 0.75
�
�
�_�+�_� 1.65
 Devaluation and the balance of payments
Exchange rate 15000
Devaluation 18000

Before devalation the current account is in balance

Description Volume Price Sterling value Dollar value
UK exports 150 £2,000.00 £300,000.00 $20.00
UK imports 10 $2.00 £300,000.00 $20.00
Current account £0.00 $0.00

Case 1: devaluation leads to a current account deficit

UK exports 160 £2,000.00 £320,000.00 $17.78
UK imports 9 $2.00 £324,000.00 $18.00
Current account -£4,000.00 -$0.22
� 0.33
�_ 0.50
_�
�_�+�_� 0.83
�
Case 2: devaluation leaves the current account unaffected
UK exports 162 £2,000.00 £324,000.00 $18.00
UK imports 9 $2.00 £324,000.00 $18.00
Current account £0.00 $0.00
� 0.40
_� 0.50
�
_
�_�+�_� 0.90
�
Case 3: devaluation leads to a current account surplus
UK exports 180 £2,000.00 £360,000.00 $20.00
UK imports 8 $2.00 £288,000.00 $16.00
Current account £72,000.00 $4.00
� 1.00
�_ 1.00
_�
�_�+�_� 2.00
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