Trade deficit

CFA Level III
#1

Can someone explain to me in simple terms how a trade deficit can lead to domestic currency devaluation?

#2

sure if you have deficit it means that you are buying more imports than you sell exports. that means that there is a net need for foreign currency ( to pay the foreign suppliers) that creates an increase demand on the currency market to buy foreign and sell domestic, which leads to currency depreciation

#3

edit: answered backwards

#4

bud that is correct but the deficit is not only created by the power of the currencies. A lot of the times domestic producers simply do not produce a lot o products, machinery etc.

#5

yeah, I I read the question wrong and thought they asked the other way around. my bad.

#6

florinpop Wrote: ------------------------------------------------------- > sure > if you have deficit it means that you are buying > more imports than you sell exports. > that means that there is a net need for foreign > currency ( to pay the foreign suppliers) > that creates an increase demand on the currency > market to buy foreign and sell domestic, which > leads to currency depreciation Thanks pop. Good explanation.