| This study investigates the effects of currency area exchange rate changes on trade balances of individual members instead of the area as a whole. A member country's trade is classified into trade inside and outside of the area. Adding the characteristics of trade by currency area, the formula for the change in trade balance are derived. From this formula, it is concluded that whether a member country's trade balance will be improved (worsened) as a consequence of area devaluation (appreciation) depends on the proportionate change in the exchange rate, price elasticities of demand for and supply of imports and exports by currency area, initial patterns of trade by currency area, and the proportionate change of imports and exports within the area to which this country belongs.; Using the derived formula, the effects of the 1971 currency realignment are evaluated empirically. Countries are classified into three currency areas: the U.S. dollar area, the area devaluing against the dollar, and the area appreciating against the dollar. Three countries of the dollar area, the U.S., Taiwan, and Thailand, are selected. In all cases the empirical evidence supports the proposed theoretical position. The price elasticities and patterns of trade by currency area significantly explain the direction of balance of trade change. Trade within the dollar area caused the U.S. trade balance to worsen and reduced the possible improvement of the Thai trade balance, but increased the Taiwanese trade surplus. |
