Table 1: Sollaria's Current account balance as a percentage of GDP, 2017 to 2023
| Year | Current account balance (% of GDP) |
|---|---|
| 2017 | -4.8 |
| 2018 | -4.5 |
| 2019 | -4.1 |
| 2020 | -3.2 |
| 2021 | -2.8 |
| 2022 | -1.5 |
| 2023 | -5.2 |
Table 2: Sollaria's High-Tech and Design Quality Index (Base year 2016 = 100)
| Year | High-Tech and Design Quality Index |
|---|---|
| 2017 | 101.2 |
| 2018 | 102.5 |
| 2019 | 103.8 |
| 2020 | 105.1 |
| 2021 | 104.8 |
| 2022 | 106.3 |
| 2023 | 105.9 |
Sollaria has experienced a structural current account deficit for several decades, driven primarily by its reliance on low-value manufacturing and primary commodities. In contrast, its imports of high-value capital goods and advanced consumer technology have surged. While Sollaria has attempted to use exchange rate depreciation to boost competitiveness, economists argue that the root cause of the deficit is a "quality and design gap" rather than just a price issue. Consumers worldwide are increasingly prioritizing brand reputation, reliability, and technological sophistication (non-price factors) over pure price.
To achieve a long-term, sustainable improvement in the current account balance, Sollaria's government has launched a national strategy to subsidize research and development (R&D) and foster high-tech entrepreneurship. By transitioning from low-value assembly to high-end, innovative product design, domestic firms aim to capture international market share.
Ultimately, the persistent deficit on the current account will only be sustainably reduced if targeted R&D investment successfully enhances the non-price competitiveness of Sollaria's exports.
Extract F states: 'ultimately, the persistent deficit on the current account will only be sustainably reduced if targeted R&D investment successfully enhances the non-price competitiveness of Sollaria's exports.'
Explain why an increase in research and development (R&D) investment and the resulting improvement in non-price competitiveness is likely to reduce the deficit on the current account of the balance of payments.
