Currency Depreciation and Competitiveness (Chain of Reasoning)
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Last updated 14 Jan 2019
Here is an example of how to build a chunky analysis paragraph using chains of reasoning addressing this question: "How might a currency depreciation affect competitiveness?"
A depreciation is a fall in the external value of a currency inside a floating exchange rate system. Consider for example, a depreciation of the UK £ (sterling) against the Euro. The £ might fall from Euro 1.50 to Euro 1.20, a drop of 20%. As a result, exporters can reduce the foreign price of goods and services sold overseas. This makes UK exports relatively cheaper in overseas markets. Relative export prices fall leading to improved competitiveness.In addition, the UK price of imported products will increase since £1 buys fewer euros. For example, imported cars will be more expensive. A rise in import prices will make domestic producers in the UK appear relatively more competitive purely in cost and price terms.