why Bother About inflation ? (3)

A third reason why most governments are anxious nowadays to avoid inflation is that it may lead to balance-of-payments difficulties.This, of course, is an especially important consideration for countries like the United kingdom, where foreign trade plays a major role in the economy inflation can weaken the balance of payments both by stimulating imports and by restricting exports. Imports will be stimulated because when the price of the domestic product rises, the foreign product becomes more attractive to the domestic purchaser, other things remaining the same, than was previously the case. On the other hand, the growth of exports will be checked by rising domestic costs and prices because, ceteris paribus, rising costs weaken the competitive position of domestic producers in foreign markets.
Of course, if the costs and prices of foreign producers are also rising,along with those of domestic producers, the consequences of inflation for the balance of payments will be less serious than if the costs of foreign producers are stable or falling. For, in the former case, the competitive position of foreign producers in the home market will be strengthened less, and the competitive position of domestic producers in the foreign markets weakened less, by inflation than in the latter case. Thus from the point of view of the balance of payments it is not inflation as such which is undesirable but rather more rapid inflation than in the rest of the world.