Which of the following is a likely consequenceof the sharp depreciation of the South Korean won against theUnited State…

Question

A. As a result, the prices of South Koreanimports into the U.S. will become more expensive.
B. As a result, the prices of Japanese exports to the U.S. willdecline.
C. As a result, inflation in South Korea will fall.
D. As a result, South Korea will gain a comparative advantage inrelation to other countries with a stable currency that export tothe United States. A. As a result, the prices of South Koreanimports into the U.S. will become more expensive.
B. As a result, the prices of Japanese exports to the U.S. willdecline.
C. As a result, inflation in South Korea will fall.
D. As a result, South Korea will gain a comparative advantage inrelation to other countries with a stable currency that export tothe United States.

Explanation / Answer

Let us consider our options. B. is out because the question says nothing of Japan, we arelooking at the trade between US and South Korea. A, C and D have to do with South Korean and US trade. Depreciation of X against Y means that X is not worth as much interms of Y. Thus say the won was previously trading at 0.0010USD and now is at 0.008 USD (for example). D. is out because this is about currency trade, not aboutproductivity. From the stated depreciation it costs more for South Koreans topurchase American currency (USD) and thus american goods are moreexpensive. Thus Koreans will buy fewer American goods so A. is the correctanswer. (For robustness, this will also create a rise in the price ofimports, thus it will increase inflation, not decrease it, so C. isout)

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