With reference to Figure 2 and Extract A, explain one likely reason for the change in the Colombian peso exchange rate between 2014 and 2016.
| Year | Price (US dollars per 1,000 Colombian pesos) |
|---|---|
| 2010 (start) | 0.51 |
| 2010 (end) | 0.53 |
| 2011 (start) | 0.52 |
| 2011 (end) | 0.54 |
| 2012 (start) | 0.55 |
| 2012 (end) | 0.56 |
| 2013 (start) | 0.57 |
| 2013 (end) | 0.53 |
| 2014 (start) | 0.52 |
| 2014 (end) | 0.42 |
| 2015 (start) | 0.41 |
| 2015 (end) | 0.32 |
| 2016 (start) | 0.30 |
Colombia has faced significant headwinds following the sharp downturn in global commodity prices starting in mid-2014. Crude petroleum and petroleum products account for approximately 45% of Colombia's total merchandise export earnings and make up nearly 5% of its GDP. A surge in global shale production combined with a slowing rate of demand growth in major emerging markets, such as China, resulted in an oversupplied global market. Consequently, Brent crude oil prices collapsed from over 100abarrelinmid−2014tounder100 a barrel in mid-2014 to under 100abarrelinmid−2014tounder40 a barrel by early 2016. This sharp drop drastically curtailed foreign direct investment (FDI) into Colombia's energy sector and severely reduced government tax revenues from state-owned oil firm Ecopetrol.
To cushion the shock, the Central Bank of Colombia allowed the peso to float freely. This weaker currency has begun to stimulate non-traditional export sectors, including agricultural goods like coffee and fresh-cut flowers, alongside a burgeoning international tourism industry. However, the currency's depreciation has imported inflation, forcing the central bank to raise interest rates to keep inflation expectations anchored within its target boundary.
103 exam-style questions on Edexcel A A Level Economics 4.1 International economics, covering 4.1.1 Globalisation, 4.1.2 Specialisation and trade, 4.1.3 Pattern of trade, 4.1.4 Terms of trade, 4.1.5 Trading blocs and the World Trade Organisation (WTO), 4.1.6 Restrictions on free trade, 4.1.7 Balance of payments, 4.1.8 Exchange rates, and 4.1.9 International competitiveness. Each one has a worked solution and a mark scheme showing where the marks go.