- A large industrialized country has recently devalued its currency in an attempt to correct a persistent trade deficit. Which of the following domestic industries is most likely to benefit from the devaluation?
A. Luxury cars.
B. Branded prescription drugs.
C. Restaurants and live entertainment venues.
A is correct. A devaluation of the domestic currency means domestic producers are cutting the price faced by their foreign customers. The impact on their unit sales and their revenue depends on the elasticity of demand. Expensive luxury goods exhibit high price elasticity. Hence, luxury car producers are likely to experience a sharp increase in sales and revenue due to the devaluation.
I’m really confused with the explanation because I thought the demand of luxury cars would decrease as its price became cheaper to foreigners (similar to what I’ve learnt from the effects of Veblen goods, which is demand decreases as price decreases).
Can anyone help me with this question please T.T