Export Essay

Economics (Macro) 25/04/2010

Explain why the recent devaluation of the £ has not resulted in a significant improvement in the export performance of the UK. (25 Marks)

Under normal circumstances a devaluation of the pound should make exports more price competitive and lead to greater export performance with greater quantities being sold. However this may not always be the case and might not always lead to a fall in the value of products imported. A fall in the exchange rate should lead to an improvement in the current accounts however following recent figures this is not true. Over the past few years given the 25% devaluation in sterling our export performance is not that impressive.

Firstly, the demand from other countries to buy UK exports has not been too good due to the recent recession. Therefore aggregate demand (AD) decreased leading to a fall in UK exports. The UK has been running a persistent current account deficit for several years, but as the economy emerges from recession and domestic spending will return thus helping growth, import growth has still been stronger than exports. The rest of the world may also have a slow recovery in demand, especially in the European Union where household spending has not been up to scratch.

Another reason it seems is ...

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Another reason it seems is that Britain’s main trading partners have been stuck in low or no growth and are therefore unable to buy more goods and services. Here the main problem is seen as the British government. It doesn’t emphasise its export promotion. For example in Germany, Graham and Brown have two big rivals. They benefit from short term German government export credit guarantees stopping the risk that Russian customers will not pay, whereas the British government doesn’t have such cover. So the point is that the British export credit guarantee department doesn’t support foreign government. It is hard to compete overseas who do have protection.

Also a thing about devaluations is that higher profitability is often seen as the first impact. This is the rebuilding of profit margins which in time should produce an incentive to sell and manufacture more. Prior to 2007, the pound was high so UK firms had to be competitive to survive. Therefore is will take time for the exports to build up as firms will want to maximise profits initially before actually selling more.

In conclusion, the recent devaluation of the pound should have resulted in better UK export performance; however this was not the case. The recent recession has reduced demand from other countries to invest in our exports, also it is hard to compete overseas who do not protection and the initial impact of devaluation takes time to pick up. The major downfall in our exports was the recent recession which effected confidence in the economy. Overall the balance of payments has gone worse into a deficit at about -4 billion pounds in January 2010. This is due to imports being higher than exports and the recession caused other countries to endure a slow recovery and therefore our exports haven’t increased as they should do in the circumstances of a devaluation of the pound.

Peer Reviews

Here's what a star student thought of this essay

groat

13th of Mar 2012

Quality of writing

The structure of this essay is good, with there being a clear introduction and conclusion. The introduction lays out what should normally happen, which shows a strong awareness. I liked how the conclusion drawer upon the significance of weak export performance, even if this wasn't explicitly asked for in the question. Spelling, punctuation and grammar are strong, and technical terms are used confidently.

Level of analysis

The analysis present in this essay is sound, discussing why a recession will cause exports to decrease (and thus aggregate demand). There is good awareness that UK exports are reliant on global demand, thus a prosperous economy within the economy can still mean weak export levels. But, as mentioned above I feel there needed to be some analysis of how a depreciation should normally cause exports to increase. This could be done with some numerical analysis, looking at how exports will be come cheaper to foreign countries. This would've then led nicely to some evaluation saying that this depends on the currency exchange globally - if the UK depreciates, but other countries depreciate further, then there will be little effect. I liked the discussion of profitability, as this shows a strong awareness of firms' goals and the effect microeconomic decisions can have on the macroeconomy. Showing such skills will gain credit! If I was doing this essay, I would've explored whether UK exports are of high enough quality as another evaluative point.

Response to question

This essay engages with the question at a good level, looking at why current external factors have an effect on exports. However, if I were doing this essay, I would've analysed why a depreciation of a currency would be expected to increase exports. There is suitable evaluation here, but a lack of analysis. Numerical analysis, such as looking at changing exchange rates would've been sufficient. I say this, as in my experience examiners cannot give you evaluation marks if there is no analysis to provide the foundations. Therefore, this essay risks getting low marks despite perceptive comments.

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