Answer to Question #131971 in Macroeconomics for krishna

Question

Discuss the view that the most significant impact of high inflation in a country is a loss of export competitiveness.

Answer 1

Competitiveness is the price of products of a country compared to an international market. To find out the comparison some factors are put into considerations; a)the actual monetary price of the good and b). the exchange rate at the time of the trade. when the inflation rate of a country is high, the price of goods tends to be high and priceless to afford to some potential customers internally reducing the demand and competitive decline as the rate is indirectly proportional to desirable compared to another country with less inflation rate.

Purchases power parity(PPP), is also a factor that determines the competitiveness of a country. Purchases power parity is a standardized measuring unit for calculating the ratio of the most affordable and essential product citizens consume through the "basket goods" approach and comparing to other nations. Most countries strive to equalize the Gross domestic product(GDP) to PPP for a desirable lifestyle. When PPP holds for a desirable time, then due to inflation in a country the country's currency depreciates losing the international value and competitiveness will increase. Here competitiveness is indirectly proportional to Purchases power parity. However, PPP does not always hold and higher inflation reduces competitiveness.