... they usually are luxury goods - this means that if income decreases the demand for the products will decrease dramatically - also if income increases - the demand will also increase. One of the major affects on the current account is the exchange rate - making the exchange rate higher per $ will mean that it will be harder for exports to export - but easier for importers to import. Price elasticity of demand for exports will increase but imports will decrease. The exchange rate is based on a demand and supply diagram, which is Shown: This diagram shows that at point Q* and $2 there is an equilibrium between demand and supply, so if the government (Bank of England) wishes to change the exchange rate £'s will need to be bought or sold. A fall in the value of sterling (depreciation) means one pound now buys fewer dollars. Sterling depreciates if ...

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