High domestic inflation reduces export competitiveness

Steps:

• Recall current account deficit means imports exceed exports plus net income/transfers.
• Identify factors affecting trade balance: domestic conditions like inflation impact relative prices.
• High inflation raises domestic prices, making exports costlier abroad and imports cheaper domestically.
• Conclude this widens trade gap, causing deficit.

Why B is correct:

• High inflation erodes competitiveness per the relative price effect, increasing imports and decreasing exports as per the balance of payments identity (CA = X - M + net transfers).

Why the others are wrong:

• A: Recession boosts savings and cuts imports, improving current account.
• C: Undervalued exchange rate cheapens exports, boosting surplus.
• D: High productivity lowers costs, enhancing export competitiveness for surplus.

Final answer: B