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Export Competitiveness and Current Account Deficit
Analyse how a country’s current account deficit might be reduced if its firms become internationally competitive.
International Trade and Exchange Rates
Frequently asked question
Be aware of potential biases in the data or research you are using.
A country's current account deficit can potentially be reduced if its firms become internationally competitive. This can be achieved through various factors that improve productivity, decrease costs, and increase the quality and demand for exports.
➡️1. High Productivity and Low Inflation:
o Internationally competitive firms tend to exhibit high levels of productivity, producing goods and services efficiently.
o High productivity allows firms to lower their costs of production, making their products more price-competitive in international markets.
o Additionally, low inflation rates contribute to stable prices, enhancing the competitiveness of exports.
➡️2. Low Exchange Rates:
o A country with a lower exchange rate relative to other currencies can gain a competitive advantage in international trade.
o A depreciated currency makes exports more affordable for foreign buyers, potentially increasing the demand for domestically produced goods and services.
o It also makes imports relatively more expensive, discouraging domestic consumers from purchasing foreign goods and reducing imports.
➡️3. Increased Production and Export Demand:
o When firms become internationally competitive, they can expand their production levels to meet the increased demand for their goods and services.
o This expansion of production leads to a rise in the volume and value of exports, contributing to an improvement in the current account balance.
o As exports increase, the revenue generated from international sales can offset the costs associated with importing goods and services, reducing the current account deficit.
➡️4. Improved Quality and Lower Prices of Exports:
o Firms that are internationally competitive often focus on enhancing the quality of their products, meeting or exceeding international standards.
o Improved quality increases the desirability and competitiveness of exports, attracting more buyers from foreign markets.
o Additionally, internationally competitive firms may have the ability to lower the prices of their exports due to cost efficiencies, making their products even more attractive to international consumers.
➡️5. Decreased Imports:
o As domestically produced goods become more competitive in terms of price and quality, the relative attractiveness of imported goods decreases.
o Consumers may shift their preferences towards domestically produced alternatives, leading to a decrease in imports.
o This reduction in imports contributes to a narrowing of the current account deficit.
In conclusion, a country's current account deficit can potentially be reduced by fostering internationally competitive firms. Through factors such as high productivity, low inflation, low exchange rates, increased production, improved quality, and lower prices of exports, a country can experience higher demand for its exports, lower imports, and an improved current account balance. However, it is important to note that achieving and maintaining international competitiveness requires continuous efforts and adaptability in a dynamic global economic environment.
- Definition of coherent analysis
- Importance of being internationally competitive
II. Being internationally competitive
- High productivity
- Low inflation
- Low exchange rates
III. How being internationally competitive increases production
- Reduces cost of production
- Decreases price of exports
- Increases quality of exports
- Increases demand for exports
- Increases value of exports / net exports
IV. How being internationally competitive affects imports
- Imports relatively more expensive
- Other countries' products more expensive
- Lower relative quality of imports
- Decreases imports
- Summary of key points
- Implications for policy and practice
Coherent analysis which might include: Being internationally competitive e.g. high productivity, low inflation, low exchange rates (max ➡️2) increases production - reduces cost of production - decreases price of exports - increases quality of exports - increases demand for exports - increases value of exports / net exports -. Imports relatively more expensive / other countries products more expensive - lower relative quality of imports - decreases imports -.