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 the trade balance between the two countries?

Question

Philoid · Accepted Answer

It is given that –

•Country A has high inflation than country B

•The exchange rate is fixed

In this case there are following possibilities –

•It is advantageous for country B to export goods to country A

•It will be expensive for country A to export goods to country B where as it will be advantageous to import form country B

•So this will give rise to imports of country A and exports of country B

•It will lead to trade surplus in country A and trade deficit in country B