A-Level Economics May/June 2025 Q1(c): Consider whether continued falls in the value of the South African rand may lead to a r…

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  A continued fall in the value of the South African rand, known as a depreciation, would make South African exports relatively cheaper for foreign buyers. At the same time, it would make imports relatively more expensive for domestic consumers and firms.

  This change in relative prices should, ceteris paribus, lead to an increase in the quantity demanded for South African exports and a decrease in the quantity demanded for imports. The resulting increase in export revenue and decrease in import expenditure would improve the net exports balance (X-M), thereby leading to a reduction in the current account deficit.

  However, whether the deficit actually reduces depends crucially on the price elasticity of demand (PED) for exports and imports. If the demand for both exports and imports is price inelastic, the fall in export prices may not trigger a significant rise in quantity demanded, and the rise in import prices may not significantly deter spending on them. In this scenario, the current account deficit could potentially worsen before it improves. A reduction in the deficit is more likely if the combined PED for exports and imports is elastic.

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  How the marks are awarded

  • M1 — The answer correctly identifies that a fall in the rand makes exports relatively cheaper, as stated in 'would make South African exports relatively cheaper for foreign buyers'.
  • M1 — The answer correctly identifies that a fall in the rand makes imports relatively more expensive, as stated in 'it would make imports relatively more expensive for domestic consumers and firms'.
  • A1 — The answer develops the analysis by linking the price changes to changes in demand and the net export balance (X-M), explaining how this reduces the current account deficit.
  • E1 — A valid evaluative point is made by questioning the certainty of the outcome. The answer correctly introduces the concept of Price Elasticity of Demand (PED) as the key condition determining the final effect on the current account.

  Common mistakes

  • Simply stating that a falling rand will reduce the deficit without explaining the mechanism of cheaper exports and more expensive imports.
  • Confusing the price effects, for example, incorrectly stating that exports become more expensive.
  • Failing to provide any evaluation. The question 'Consider whether...' requires a two-sided argument, so a purely descriptive answer will not score the evaluation mark.
  • Providing a vague evaluation, such as 'it depends on the economy', without specifying the condition, which in this case is primarily the price elasticity of demand.

  Examiner tip: For 'consider whether' questions, always build your chain of analysis first, then challenge a key assumption within that chain (like elasticity of demand) to provide effective evaluation.

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