MYTUTOR SUBJECT ANSWERS

387 views

Discuss the effectiveness of a change in the exchange rate in order to correct a trade deficit.

Intro:

Define trade deficit: A trade deficit occurs when the value of a countries imports exceeds the value of a countries exports. 

Explain the effect of a change in the exchange rate: A fall in the Uk's exchange rate would result in an increase in the price competitiveness of UK exports overseas. Another result of this would be a fall in the price competitivness of imports. 

This means that there will be an increase in the quantity of exports sold, and a fall in the quantity of imports purchased by the UK, due to the change in price competitiveness. 

This will potentially correct the trade deficit, because as the value of imports falls, and the value of exports increase, the net surplus in the UK will become positive. 

Evalutation: 

However, an increase in the UK's exchange rate would have the opposite effect, with price competitiveness of imports increase, and price competitiveness of exports decreasing. This means that quantity of exports sold will fall, and quantity of imports bought will increase, resulting in a further trade deficit. 

Also, if either imports or exports are price inelastic, a change in price may result in less than responsive change in demand, which could lead to a worsening trade deficit. 

Conclusion:

To conclude, an increase in the Uk's exchange rate could be effective in correcting a trade deficit, however factors such as the elsticity of the goods imported and exported, as well inflation in other counties, must be considered to calculate just how effective this method is. 

Arjun S. GCSE Economics tutor, A Level Economics tutor, A Level Polit...

12 months ago

Answered by Arjun, a GCSE Economics tutor with MyTutor


Still stuck? Get one-to-one help from a personally interviewed subject specialist

84 SUBJECT SPECIALISTS

£20 /hr

Liam B.

Degree: Mathematics & Economics (Joint Honours) (Bachelors) - Durham University

Subjects offered:Economics, Maths

Economics
Maths

“I am currently an undergraduate student studying Mathematics & Economics at Durham University. I have always found myself enjoying Maths during my...”

£18 /hr

Elizabeth S.

Degree: International Relations (Bachelors) - Durham University

Subjects offered:Economics, History+ 1 more

Economics
History
English

“About me: Hi, my name’s Lizzie and I’m currently in my first year at Durham University studying International Relations. I understand how stressful and daunting exams can be and how helpful one-to-one sessions are to consolidate the i...”

MyTutor guarantee

£18 /hr

Rhys M.

Degree: Economics (Bachelors) - Durham University

Subjects offered:Economics, Maths+ 2 more

Economics
Maths
History
Geography

“About Me I am currently studying Economics at Durham University. Economics is a very broad subject, so I am very passionate about many other subjects and do a lot of reading around my subject. I was delighted to be awarded the top spo...”

About the author

Arjun S.

Currently unavailable: for regular students

Degree: Business and Accounting (Bachelors) - Exeter University

Subjects offered:Economics, Politics+ 2 more

Economics
Politics
Maths
-Personal Statements-

“I am a second year university student studying Business and Accounting at the University of Exeter, and have always had a real passion for Economics and Finance.”

You may also like...

Other GCSE Economics questions

How do barriers to entry help monopolies maintain power?

What factors cause the shifts and movements of the demand curve?

What is the Philips Curve?

What will happen to the demand for Primark clothing following an increase in national income?

View GCSE Economics tutors

We use cookies to improve your site experience. By continuing to use this website, we'll assume that you're OK with this. Dismiss

mtw:mercury1:status:ok