If a country's import bill is high, she can encourage exports by___________

1. Analyze the question The country spends too much on imports (a high import bill). The question asks which policy would encourage exports, which helps correct the imbalance.

2. Explain the concept Exchange rate changes affect trade competitiveness:

• Depreciation means the local currency falls in value against foreign currencies. Your goods become cheaper for foreigners, so exports rise. Imports become more expensive for locals, so imports fall.
• Appreciation does the opposite. Exports become more expensive abroad and imports become cheaper.

3. Step-by-step solution

• Option A, depreciate the currency: Suppose ₦1,000 = $1 and the currency depreciates to ₦1,500 =$1. A Nigerian product priced at ₦3,000 costs a foreign buyer $3 before and only$2 after. Demand from abroad rises, so exports are encouraged. This is correct.
• Option B, appreciate the currency: Exports become costlier for foreigners, so exports fall and the import bill worsens. Wrong.
• Option C, liberalize importation: Removing import restrictions increases imports, which worsens the import bill and does nothing to encourage exports. Wrong.
• Option D, tax all locally produced goods: Higher taxes raise production costs and prices, which makes exports less competitive. Wrong.

4. Answer A. Allowing her currency to depreciate

5. Exam tip Remember: "Depreciation Drives exports Down in price, so Demand abroad goes up." When a question mentions a high import bill or a trade deficit, think of depreciation or devaluation, import restrictions, and export promotion. Be careful with the opposite words, since appreciation hurts exports.