Dynamics of External Adjustment
Dollar currency paradigm means that dollar matters a lot in global trade. So suppose, India and Brazil are involved in a bilateral trade whereby India buys oil from Brazil while Brazil buys pharmaceutical drugs from India. Now, it's assumed that the prices are set in the currency of the exporting nation, that is, oil is priced in Brazilian real while drugs are priced in the rupee. What happens when the real-rupee exchange rate depreciates, that is, more rupees being required to buy unit real relative to before. Conventional theories suggest that weaker rupee would make Indian drugs cheaper for Brazilians, thereby increasing its demand and thereby increasing Indian drug imports into Brazil or Indian exports of drugs. Note that the prices are assumed to be sticky which enables demand fluctuations to translate into volume fluctuations. A weaker rupee would make Brazilian oil expensive and reduce its imports in India or reduce Brazilian oil exports to India. In short, India's expor