Explain two factors that could cause a fall in the volume of UK exports

AQA AS-Level Paper 2 June 2020 Insert

Extract E (lines 9–10) states: ‘Inevitably, the volume of exports will fall, and it is highly likely that the trade deficit will increase further.’ Explain two factors that could cause a fall in the volume of UK exports. (10 marks)

Exports are goods and services sold to other countries.

One factor that can affect UK exports is changes in labour productivity. Labour productivity is a measure of output per worker per hour. A fall in labour productivity in the UK means that firms would have to hire more staff to produce the same amount of output. The effects of this can be illustrated a decrease in short-run aggregate supply. This causes an increase in the price level from pl1 to pl2, which is known as cost-push inflation. This means UK goods and services are now less competitive compared to other countries, meaning that UK firms would find it harder to sell their exports. Therefore, the volume of exports would fall.

Another factor that could affect the volume of UK exports is the exchange rate. Exchange rates are the value of a currency in terms of another. For example, if interest rates in the UK were to increase, this would mean there is a higher reward for saving, and therefore this would attract hot money flows. This would lead to an increase in demand for the pound, and therefore cause the pound to appreciate. As the pound is stronger, exports are more expensive and imports are cheaper. Since UK exports are more expensive (due to a more expensive pound), the volume of UK exports would be likely to fall.

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