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Exporting Raw Materials and Economic Outcomes

Discuss whether a country exporting its raw materials always benefits its economy.

Category:

International Trade and Exchange Rates

Frequently asked question

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Answer

Prioritize quality over quantity—focus on providing in-depth analysis rather than lengthy descriptions.

Exporting raw materials can have both positive and negative effects on a country's economy. While it can generate export revenue and contribute to economic growth, there are also potential drawbacks that need to be considered. Let's analyze these points in more detail:
Advantages of Exporting Raw Materials:
➡️1. Export Revenue and Current Account: Exporting raw materials generates revenue from international trade, which can improve the country's trade balance and current account position. This influx of foreign currency can contribute to economic stability and enable the country to finance imports and investments.
➡️2. Increased Total Demand and Economic Growth: Exporting raw materials can increase total demand in the economy, leading to higher incomes and economic growth. This can stimulate domestic industries and create employment opportunities.
➡️3. High Prices and Inelastic Demand: If the raw materials being exported are highly priced and in inelastic demand, it can result in favorable terms of trade. The country can earn higher revenues per unit of raw material exported, providing a boost to its economy.
Disadvantages of Exporting Raw Materials:
➡️1. Demand-Pull Inflation: When raw material exports significantly increase total demand in an economy operating close to full capacity, it can lead to demand-pull inflation. This inflationary pressure can erode the purchasing power of domestic consumers and reduce overall welfare.
➡️2. Competitiveness of Finished Products: Exporting raw materials may result in increased competition for the country's finished products both domestically and internationally. This can lead to a decline in the country's exports of value-added goods and an increase in its imports of finished products.
➡️3. Depletion of Raw Materials: Exporting raw materials without sufficient domestic processing and value addition may deplete the country's finite resources. This can limit its ability to sustain long-term economic growth and diversify its exports.
Effect on Exchange Rate: Exporting raw materials can influence the exchange rate of a country. It may lead to an appreciation of the domestic currency, which can have mixed effects. On one hand, an appreciation makes imports relatively cheaper, benefiting consumers and businesses that rely on imported inputs. On the other hand, it can make the country's finished products less price-competitive in international markets, potentially impacting export volumes and profitability.
In conclusion, while exporting raw materials can bring economic benefits such as export revenue and increased total demand, there are also potential drawbacks such as demand-pull inflation, reduced competitiveness of finished products, and resource depletion. The impact on the exchange rate further adds complexity to the analysis. Therefore, careful consideration of the specific context, resource management, and diversification strategies is crucial to maximize the benefits and mitigate the risks associated with exporting raw materials.

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I. 🍃Introduction
- Brief explanation of the topic

II. Reasons why exporting can be beneficial (up to ➡️5 marks)
- Generate export revenue
- Improve current account position
- Increase total demand
- Lead to economic growth
- Cause a rise in employment
- Raw materials are highly priced and in inelastic demand

III. Reasons why exporting may not be beneficial (up to ➡️5 marks)
- Cause demand-pull inflation
- Enable foreign countries to compete with finished products
- Increase imports of finished products
- Deplete raw materials
- Reduce ability to produce and export in the future

IV. Possible effect on the exchange rate (up to ➡️3 marks)
- May lead to an appreciation in the exchange rate
- Advantage: more imports can be purchased with the same volume of exports
- Disadvantage: domestic products may be less internationally competitive

V. 👉Conclusion
- Summary of the points discussed
- Final thoughts on the topic

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Up to ➡️5 marks for why it might: It will generate export revenue - this will appear in the trade in goods balance - which may improve the current account position -. Exporting will increase total demand - increasing incomes - leading to economic growth - causing a rise in employment -. Exporting will be more beneficial if the raw materials are highly priced - and in inelastic demand -.
Up to ➡️5 marks for why it might not: Exporting can cause demand-pull inflation - as it will increase total demand - when an economy is operating close to full capacity -. Exporting raw materials enables foreign countries to compete with the country’s finished products at home and abroad - reducing the country’s finished exports - and increasing the country’s imports of finished products -. Exporting raw materials may deplete raw materials - reducing the country’s ability to produce and export in the future -.
Up to ➡️3 marks for possible effect on the exchange rate: May lead to an appreciation in the exchange rate - may be in an advantage in that more imports can be purchased with the same volume of exports - may be a disadvantage as it may make domestic products less internationally competitive -.

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