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?
The exchange rate , is one of the most important determinant of a country’s trade. It plays a vital role in the country’s level of trade. As per the above condition, it is favourable for country A to import goods and on the other hand, for country B export is favourable. As a result, exports of country B to country A will increase, hence imports of country A will increase.