top of page

A level and O level ECONOMICS 

Access 400+ Economics Essays With the Economics Study Pack 
(Free previews below!)

What if you could score the highest grades possible on your economics essays? Subscribe and get access to a collection of high-quality A+ economics essays.

  • Well structured

  • Simple and clear english

  • Diagrams included where relevant

  • For A level, AS level, GCSEs and O level.

 

www.toolazytostudy.com.png

Impact of Foreign Exchange Rate Fall on Current Account Deficit

Analyse how a fall in a country’s foreign exchange rate could reduce a deficit on the current account of its balance of payments.

Category:

International Trade and Exchange Rates

Frequently asked question

tgu9i.PNG

Answer

Use a consistent citation style throughout your essay.

➡Title: The Impact of a Fall in Foreign Exchange Rate on Current Account Deficit
🍃Introduction: A country's current account deficit occurs when the value of debit items, including imports, exceeds the value of credit items, such as exports, in its balance of payments. This essay aims to analyze how a fall in a country's foreign exchange rate can help reduce a deficit on the current account.
I. Effects of Exchange Rate Depreciation ➡️1.➡️1 Exchange Rate Depreciation: A fall in the foreign exchange rate, also known as depreciation or devaluation, refers to a decrease in the value of a country's currency relative to other currencies. This depreciation can have significant implications for a country's trade balance and the current account.
➡️1.➡️2 Impact on Export Competitiveness: A lower exchange rate reduces the price of exports in foreign markets, making them more affordable and competitive. This can lead to an increase in the demand for exports, resulting in higher export volumes and revenue. The depreciation makes domestic goods relatively cheaper for foreign buyers, encouraging them to choose domestic products over imports.
➡️1.➡️3 Influence on Import Competitiveness: Conversely, a fall in the exchange rate increases the price of imports. This price increase makes imported goods more expensive for domestic consumers, potentially leading to a decline in the demand for imports. Consumers may switch to domestically produced alternatives, reducing import expenditure and decreasing the outflow of money from the country.
II. Impact on Net Exports and Current Account ➡️2.➡️1 Effect on Net Exports: The combination of increased export revenue and reduced import expenditure resulting from the depreciation of the exchange rate can lead to an improvement in a country's net exports. Net exports represent the difference between export earnings and import payments. By boosting export competitiveness and curbing import demand, the current account deficit can be reduced or even transformed into a surplus.
➡️2.➡️2 Impact on Secondary Income: A fall in the exchange rate may also influence secondary income, such as remittances sent by citizens working abroad. As the value of the domestic currency declines, the relative value of remittances in domestic currency terms increases. This results in higher secondary income inflows, contributing to the reduction of the current account deficit.
👉Conclusion: A fall in a country's foreign exchange rate can have a significant impact on its current account deficit. By making exports more competitive and imports relatively more expensive, the depreciation of the exchange rate can stimulate export growth, reduce import demand, and improve the trade balance. This, in turn, can contribute to a reduction in the current account deficit. Furthermore, the increase in secondary income resulting from a lower exchange rate can also contribute to narrowing the deficit. However, it is important to note that the effectiveness of exchange rate depreciation in reducing the current account deficit may depend on factors such as the price elasticity of demand for exports and imports, as well as other economic variables and policies.

rurtrrutu.PNG

I. 🍃Introduction
- Definition of deficit and its impact on the balance of payments
- Explanation of how a fall in the exchange rate can affect the deficit

II. Depreciation/Devaluation
- Definition of depreciation/devaluation
- How it reduces the price of exports and increases the price of imports
- Impact on competitiveness of exports and imports
- How it can lead to an increase in demand for exports and a decrease in demand for imports

III. Increase in Export Revenue
- Explanation of how an increase in demand for exports can lead to an increase in export revenue
- How this can lead to an increase in money flowing into the country

IV. Reduction in Import Expenditure
- Explanation of how a decrease in demand for imports can lead to a reduction in import expenditure
- How this can lead to a reduction in money flowing out of the country
- How it can lead to a switch from imports to domestically produced products

V. Increase in Net Exports
- Explanation of how an increase in export revenue and a decrease in import expenditure can lead to an increase in net exports
- Importance of price elasticity of demand in determining the impact on net exports

VI. Increase in Secondary Income
- Explanation of how an increase in the value of remittances can lead to an increase in secondary income
- Importance of secondary income in reducing the deficit

VII. 👉Conclusion
- Summary of the main points
- Importance of exchange rate policy in reducing the deficit.

lkml.PNG

Coherent analysis which might include: Deficit occurs when debit items including imports on the current account of the balance of payments exceed credit items including exports -. Fall in the exchange rate would reduce price/value of the currency / depreciation/devaluation has occurred - this would reduce the price of exports - increase price of imports - make exports more competitive / imports less competitive - demand for exports is likely to rise / exports increase - increase export revenue / money flowing into the country - demand for imports is likely to fall / imports reduce / switch from imports to domestically produced products - reduce import expenditure / reduce money flowing out of the country - increase net exports - if demand is price-elastic -. Value of remittances/money sent home may rise - increasing secondary income -.

lkml.PNG

lkml.PNG

lkml.PNG

Halftone Image of a Hand

The above material is protected and is not to be copied.

bottom of page