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Econ306Lecture7 - International Economics II Lecture Notes...

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International Economics II Lecture Notes 7 Alper Duman July 24, 2009 Alper Duman International Economics II Lecture Notes 7
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Price Adjustments and Balance of Payments Disequilibrium I Expenditure switching I Price and income elasticities are important I Price adjustment mechanisms differ for non-tradables Alper Duman International Economics II Lecture Notes 7
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I Market stability occurs when the characteristics of supply and demand are such that the market move back to the equilibrium. I Backward-sloping supply curves can make markets instable. I A country facing an inelastic foreign demand for its exports will experience a backward-sloping supply curve of foreign currency. Alper Duman International Economics II Lecture Notes 7
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I Exchange rate stability depends on export and import price elasticities I MARSHALL-LERNER CONDITION states that X M | η Dx | + | η Dm | > 1 (1) where X is the expenditures on exports, M is the expenditures on imports, | η Dm | is the absolute value of the home-country
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