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Why does relative rather than absolute inflation affect the current account?

A

Absolute inflation matters: competitiveness falls whenever domestic prices rise, regardless of rivals'.

B

Relative inflation matters: competitiveness falls when domestic prices rise faster than rivals'.

C

Exchange-rate inflation matters: competitiveness falls whenever the currency appreciates, regardless of prices.

D

Relative deflation matters: competitiveness falls when domestic prices rise more slowly than rivals'.

Card 1 of 25

10.2.2 relationship between the balance of payments and inflation Flashcards

  1. Intl A Level
  2. /Economics
  3. /10.2.2 relationship between the balance of payments and inflation

25 flashcards on CIE Intl A Level Economics 10.2.2 relationship between the balance of payments and inflation: the key terms and definitions you need to recall.

Flashcards