Discuss the view that the most significant impact of high inflation in a country is a loss of export
competitiveness [15 marks]
Inflation is the sustained increase in the general price level of an economy. Exports are the
goods and services produced in a country and sold externally (another country), while
export competitiveness refers to the ability of an economy to increase their net exports by
selling more streamlined domestic products within a global economy.
High inflation can have numerous consequences. The first consequence is the increase in
indirect costs for individual firms - for example, supermarkets will tend to print off more price
tags due to continuously fluctuating price levels, increasing their total overall costs. In addition,
indirect costs tend to also increase as fluctuating price levels may force firms to only sell their
best-selling products, which increases the firm’s stock costs of storing unwanted products.
Individual households tend to save less as a high inflation rate results in general price levels
increasing, which ultimately forces individuals to stop saving, especially if they are not receiving
an encouraging interest rate from banking institutions. High inflation rates within an economy
result in a loss of export competitiveness as the economy’s exports become more expensive to
external economies, hence falling whereas imports become preferred as they are cheaper than
the domestic goods produced in the economy.
The Democratic Republic of Congo (DRC) is known as one of the poorest countries in the world,
with a GDP per capita of a mere $400. However, for the last decade, they have been tipped as
the world’s richest country in relation to the value of their natural resources. DRC exports their
rich natural resources like minerals, inclusive of gold and diamond, along with petroleum to
nations like China, Zambia and the United Arab Emirates. The inflation rate in DRC in 2017 was
35.79%, in comparison to the stable 3.15% in 2016, which resulted in exports decreasing from
in excess of US$80 million in 2016 to US$26.23 million in 2017 exported to the UAE. As stated
above, as exports became increasingly expensive, the UAE would have relied on either
domestic products, or imports from another nation whose inflation rate was stable.
The diagram above is an example of a supply-side policy that can be used to lower inflation
rates. LRAS 1 increases to LRAS 2, reducing price levels, assisting in achieving economic
growth. Real GDP increases from Y1 to Y2 at a lower price level, as a lower price attracts the
majority of population to purchase products, i.e. the purchasing power of individuals increases
within an economy.
The most significant impact of high inflation in a country is a loss of export competitiveness -
domestic products being sold in a global market tend to increase economic growth locally.
However, it can be argued that the most significant impact of high inflation can be the
redistribution effects - individuals are less inclined to save, whereas lenders benefit most from
high inflation rates. Export competitiveness in an important economic objective of the majority of
economies around the world, if not all. A strong export connection and framework within an
economy enables national economies to strengthen the relative power of their domestic
products around the world, which by virtue financially strengthens an economy’s GDP. Due to
high inflation rates, the average sustained price level for products increases, which means that
the purchasing power of consumers decreases. In addition, high inflation could also significantly
affect daily wage workers, as these workers may be let off due to increasing costs of operations.
As mentioned above, the most significant impact of high inflation in a country is a loss of export
competitiveness - as this largely contributes to the economic health of an economy. Other
consequences of high inflation are extremely of importance, however since exports have the
ability to generate large amounts of capital, it hence can be considered to be the most
significant consequence of high inflation rates.