Trade Surplus Effects on Exchange Rate and Export Prices

Steps:

• Trade surplus in balance of payments means exports exceed imports, creating excess foreign currency supply.
• This boosts demand for domestic currency in foreign exchange markets.
• Domestic currency appreciates as its value rises relative to foreign currencies.
• Appreciation makes exports costlier abroad, prompting exporters to lower domestic prices for competitiveness.

Why B is correct:

• Under floating exchange rates, a trade surplus appreciates the currency per the balance of payments equilibrium, reducing export competitiveness and leading to lower export prices in domestic terms to sustain sales volume.

Why the others are wrong:

• A: Appreciation does not cause export prices to fall; it raises foreign-currency prices, requiring price adjustments but not direct causation as stated.
• C: Surplus causes appreciation, not depreciation, so export prices do not fall via this mechanism.
• D: Surplus causes appreciation, not depreciation; depreciation would lower export prices but contradicts the surplus effect.

Final answer: B