Business – 6.1 External influences – Economic | e-Consult
6.1 External influences – Economic (1 questions)
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Impact on the Current Account
- Depreciation (or devaluation) under a floating regime makes exports cheaper and imports more expensive, improving the trade balance and thus the current account.
- Appreciation under a fixed regime (maintained by foreign exchange interventions) can make exports less competitive, potentially worsening the current account.
Impact on Inflation
- When the currency depreciates, import prices rise, feeding cost‑push inflation.
- A stable fixed exchange rate can anchor inflation expectations, but if the peg is overvalued it may require tight monetary policy to control imported inflation.
Case Example
Country X moved from a fixed to a floating exchange rate in 2022. After the shift, the pound fell by 10 % against the dollar.
- Exports to the US increased by roughly 8 % due to lower prices.
- The current‑account deficit narrowed from 5 % of GDP to 2 % of GDP.
- Import‑price inflation rose by 3 % points, contributing to a rise in overall inflation from 2 % to 4 %.
Comparison Table
| Policy | Current‑Account Effect | Inflation Effect |
| Fixed (peg) | May worsen if peg is overvalued | Can stabilise if credible; risk of imported inflation if peg overvalued |
| Floating | Improves when currency depreciates | Higher import‑price inflation after depreciation |
Thus, exchange‑rate policy must be coordinated with fiscal and monetary measures to balance the benefits to the current account against the risk of higher inflation.