Evaluate how effective an exchange rate depreciation is in enhancing a country’s standard of living.
b. Evaluate how effective an exchange rate depreciation is in enhancing a country’s standard of living. [15] Introduction
A depreciation of the exchange rate occurs when a country’s currency loses value relative to other currencies, making exports cheaper and imports more expensive. This can influence a country’s standard of living (SOL) in both positive and negative ways. On one hand, a weaker currency can boost net exports (X-M), leading to higher aggregate demand (AD), economic growth, and employment, which in turn improves both material and non-material aspects of living standards. On the other hand, a weaker currency can lead to imported inflation, which reduces purchasing power and may lower living standards, especially in economies heavily dependent on imports. Additionally, the effectiveness of depreciation in improving standard of living depends on factors such as the Marshall-Lerner condition, the country’s dependence on trade, and its resource endowments.
How a Depreciation of the Exchange Rate Can Improve Standard of Living
A weaker exchange rate makes exports cheaper for foreign buyers and imports more expensive for domestic consumers. This results in a rise in demand for exports and a fall in demand for imports, leading to an improvement in net exports (X-M). A rise in (X-M) increases aggregate demand (AD) from AD0 to AD1, which leads to higher real national income (NY) via the multiplier effect from Y0 to Y1.
As the economy expands, businesses increase production, leading to higher economic growth and higher incomes for individuals.
With greater disposable income, individuals have an increased ability to purchase goods and services, improving material standard of living.
As demand for exports rises, firms need to increase production, requiring them to hire more workers. This leads to a fall in unemployment rates, improving household incomes and purchasing power.
Employed individuals enjoy higher living standards than those who are unemployed, as they have more financial stability. A lower unemployment rate also contributes to non-material standard of living, as lower joblessness reduces social unrest and crime rates, leading to a more stable and cohesive society.
The Marshall-Lerner Condition: The extent to which a depreciation improves (X-M) depends on the Marshall-Lerner condition, which states that for a depreciation to improve the balance of trade, the sum of the price elasticities of demand for exports and imports must be greater than one.
If demand for exports and imports is price-inelastic, a weaker exchange rate may not significantly increase export demand or reduce import demand, limiting the effectiveness of depreciation in boosting AD and economic growth.
How a Depreciation of the Exchange Rate May Worsen Standard of Living
1. A depreciation makes imported goods more expensive, increasing the cost of raw materials, fuel, and essential goods. If a country is heavily dependent on imports (e.g., for food, energy, and industrial inputs), this can lead to higher overall production costs. The rise in production costs results in cost-push inflation, causing firms to raise prices, which reduces consumers' real purchasing power. As inflation erodes wages, individuals struggle to afford goods and services, leading to a decline in material standard of living.
2. For economies that lack natural resources (such as Singapore), import dependence is high, making them more vulnerable to inflationary pressures from depreciation. A significant rise in import prices can outweigh the benefits of increased exports, potentially leading to a net decline in living standards.
Conclusion
The effectiveness of exchange rate depreciation in improving standard of living depends on several factors. Firstly, if the country has a high dependence on trade, a depreciation can have a stronger impact on net exports, boosting economic growth and employment. Secondly, the Marshall-Lerner condition must be satisfied for depreciation to improve (X-M) and effectively increase AD. Thirdly, for countries that lack natural resources and rely heavily on imported necessities, the negative impact of higher import prices may outweigh the benefits of higher exports, leading to a decline in real purchasing power and material well-being. Lastly, if a country is already operating at full employment, an increase in AD may lead to demand-pull inflation, further eroding real incomes. Therefore, while depreciation can boost economic growth and employment, it is not always guaranteed to improve standard of living, especially for import-dependent economies facing inflationary pressures.
🧠 H2 TYS Crashcourse – Write to Score, Not Just Study
Reading model essays helps. Writing your own — under pressure — is what earns the A.
If you're serious about mastering exam techniques for Paper 1 and 2, you need more than just passive revision. You need structure, strategy, and expert support. That’s exactly what the ETG H2 Ten-Year Series Crashcourse delivers.
At Economics at Tuitiongenius, Singapore’s most trusted economics tuition centre, we’ve crafted a powerful 3-day intensive to help you tackle the most tested A Level questions with confidence.
🎯 Conquer the TYS, Conquer the A Levels
60 Essays. 20 CSQs. 3 Game-Changing Days.
Led by Mr Eugene Toh, one of the top economics tutors in Singapore, this H2 economics tuition programme gives you the exact tools and mindset to write like a distinction-scorer.
🔍 What’s Included:
✅ 60 A Level Essays + 20 CSQs (2014–2023) – Real questions, real practice
✅ Live Lessons (Oct 24, 27, 30) – Zoom or Onsite
✅ Lifetime Access to Recordings – Rewatch whenever you need
✅ Printed Booklets Delivered – Model answers, drills, and structured exercises
✅ Answer Technique Coaching – Learn how to evaluate, plan, and save time in the exam
✅ Live Guidance from ETG Tutors – Personalised, exam-smart feedback
💬 “It’s like training with the answer key — except you learn how to think and score on your own.”
💡 Ideal For:
JC2 students aiming to jump from a B to an A
Those recovering from shaky Prelims
Anyone searching for JC economics tuition that focuses on high-yield practice
Students who want structured online economics tuition before the final paper
📦 tuitiongenius.com/h2-tys
📲 WhatsApp us at 8168 3986 — we’ll help you secure your seat
Stop second-guessing your answers. Start writing like the top scorers — with ETG.
Let this October be the breakthrough you’ve been waiting for.