2.1 - Measures of Economic Performance

Question 1

What is macroeconomics?

Answer 1

Macroeconomics is a part of economics focusing on behavior of collective businesses and consumers, as well as the impact of the government on these collective businesses and consumers.

Question 2

List the four macro-economical objectives.

Answer 2

• Inflation
• Economic growth
• Unemployment
• Balance of payments

Question 3

Give some alternative macro economical objectives.

Answer 3

• Greater equality (regional/wealth/income)
• Increased access to public services
• Environmental sustainability
• Improved economic well-being (social welfare/mobility)

Question 4

What is economic growth in the short run?

Answer 4

In the short run, economic growth is the actual annual percentage change for real national output.

Question 5

How do you measure economic growth in the short run?

Answer 5

In the short-run, economic growth is measured by the percentage change in real GDP (gross domestic product) per year.

Question 6

What is economic growth in the long run?

Answer 6

In the long run, economic growth is the increase in the potential productive capacity of an economy.

Question 7

How is economic growth in the long run measured?

Answer 7

In the long run, economic growth is measured through the shift in the PPF graph (production possibility frontier - illustrates maximum potential output of capital and consumer goods, taking into account scarce resources).

Question 8

Define GDP.

Answer 8

Gross Domestic Product, or GDP, is the total market value of all goods and services produced within a country within a year.

Question 9

Give two ways to calculate the GDP.

Answer 9

GDP can be calculated either by adding total income (wages, interest, profits) within a year or total expenditure (consumption, investment, net exports) within a year; this means that the national output = national income = national expenditure.

Question 10

What is national expenditure?

Answer 10

National expenditure is the total government spending in an economy.

Question 11

What is nominal GDP?

Answer 11

Nominal GDP is the GDP expressed in monetary terms, not taking into account the inflation.

Question 12

What is real GDP?

Answer 12

Real GDP is GDP which includes market value of production of goods and services as well as inflation.

Question 13

What does nominal GDP measure?

Answer 13

Nominal GDP measures national output at current prices but it doesn’t include effects of inflation.

Question 14

What does real GDP measure?

Answer 14

Real GDP measures output at constant prices and it also includes the effects of inflation, which is why economists refer to real GDP when discussing economic growth. This is because inflation can decrease a GDP, so the nominal GDP may show the GDP higher than it really is.

Question 15

Give the formula for real GDP.

Answer 15

Real GDP = Nominal GDP / Average price level

Question 16

What is a ‘boom’ in an economy?

Answer 16

If there are long periods of economic growth, then these are referred to as ‘booms’.

Question 17

What is an economic recession?

Answer 17

If, for at least two consecutive quarters (each quarter lasting 3 months), negative economic growth occurs then this is referred to as a recession. Long periods of economic downturn can result in an ‘economic depression’.

Question 18

What is the total real GDP?

Answer 18

The total (real) GDP is the value of goods and services produced within a country in a given year. This can be used my economists to deduce the size of the economy and compare with other countries.

Question 19

Define GDP per capita?

Answer 19

GDP per capita is the total GDP divided by the population of the country, allowing economists to see standards of life for citizens.

Question 20

Give the two indicators of GDP per capita.

Answer 20

• GNI (Gross National Income)

- GNP (Gross National Product)

Question 21

Define GNI.

Answer 21

Gross National Income is the GDP per capita + net income abroad. Net income from abroad include income earned from international investments and owned assets abroad, but not from domestic investments by foreigners.
GNI per capita = (Total GNI) / Population of country

Question 22

Define GNP.

Answer 22

Gross National Product or GNP, is total output earned from domestic businesses both in the country and abroad.
GNP per capita = (Total GNP) / Population of country

Question 23

Why are GDP per capita, GNI and GNP per capita not so accurate?

Answer 23

GDP, GNI and GNP per capita do demonstrate the living standards of a country, but because not every countries uses USD ($), the exchange rate shows that economists aren’t seeing the true living standards.

Question 24

What is the PPP?

Answer 24

Purchasing Power Parity or PPP, is a principle used where the purchasing power, or real value of a certain amount of money in a country is used to obtain the real living standards of that nation; e.g. $1 in poor countries will get you a lot of goods, while in developed nations it won’t get much goods.

Question 25

Give a benefit of using PPP.

Answer 25

The Purchasing Power Parity will help adjust GDP to demonstrate purchasing power of goods in that country, allowing for a more accurate representation of living standards.

Question 26

How is the volume of goods different from the value of goods in a country?

Answer 26

The volume of goods shows the quantity of goods and services produced within a country whereas the value indicates the monetary worth of these goods and services.

Question 27

State a limitation of using GDP and GDP per capita to compare living standards.

Answer 27

• GDP and GDP per capita ignore the shadow/hidden economy; the shadow economy is the illegal economy involving the black market and smuggling of illegal goods, cross-border shopping. All this is ignored in the GDP.

Question 28

Describe another limitation of GDP and GDP per capita to compare living standards.

Answer 28

• GDP and GDP per capita ignores negative externalities such as pollution, which can severely affect health of several consumers.

Question 29

Give a third limitation of GDP and GDP per capita to compare living standards.

Answer 29

• Economic growth can cause severe inequalities in income, wealth or region and these inequalities are not taken into account by GDP or GDP per capita.

Question 30

Define happiness economics.

Answer 30

Happiness economics is a branch of economics investigating how happy and content individuals are about their life.

Question 31

What is the Easterlin Paradox?

Answer 31

The Easterlin Paradox is a theory of the relationship between real income and happiness; it proves that although happiness initially rises with the increase in income, it will stop rising beyond a certain economic threshold. As a result, rich societies tend to be less happier than poorer societies.

Question 32

Give a problem of comparing developing and developed countries.

Answer 32

Accuracy of statistics differs very dramatically between developed and developing nations; contrary to popular belief, developing countries do produce many goods but the goods they produce are also consumed by them on the market. So no money is made/there is no monetary value.

Question 33

State another disadvantage of comparing developed and developing countries.

Answer 33

Although developed countries appear successful, what actually happens is that governments increase income at the expense of causing more stress, more congestion and longer working hours.

Question 34

Give a third disadvantage of comparing developed and developing countries.

Answer 34

Developing nations may sometimes aspire to achieve growth at the cost of health and safety regulations.

Question 35

Define inflation.

Answer 35

Inflation is the sustained rise in the average level of prices and fall in the purchasing power of money.

Question 36

What is deflation?

Answer 36

Deflation, or negative inflation, is where there is a decrease in the average price level and slowing down in the rate of prices increasing.

Question 37

Give a cause of deflation.

Answer 37

Consumers may delay purchasing decisions in the fear that prices may fall as a result of the decrease in average price levels.

Question 38

What problems can deflation cause?

Answer 38

Deflation can cause a decrease in demand and consumption of goods and services, causing firms to not be so confident about investing. This will significantly harm the AD (Aggregate Demand) as a result.

Question 39

What is Aggregate Demand (AD)?

Answer 39

Aggregate demand is the total demand of all finished goods and services within an economy.

Question 40

Give the formula for aggregate demand.

Answer 40

AD = C + I + G + (X - M)

Consumption + Investment + Government spending + (total exports - total imports) = Aggregate demand

Question 41

What is disinflation?

Answer 41

Disinflation is a fall in the inflation rate, so prices are rising at a slower rate. Unlike deflation, where inflation rate can fall below 0%, in disinflation the inflation rate falls but stays positive.

Question 42

Give two methods used by the UK to measure inflation.

Answer 42

• CPI (Consumer Prices Index)

- RPI (Retail Prices Index)

Question 43

What is the basket of goods and services?

Answer 43

The basket of goods and services is a model used by the Office of National Statistics to influence both the CPI and RPI. It contains about 700 goods and services representing typical consumer purchases in the UK, with prices collected from about 150 different locations in the UK.

Question 44

How are goods typically weighted in the basket of goods and services?

Answer 44

In the basket of goods and services, goods are generally weighted by how significant they are to consumers and how important they are to a consumer’s income; petrol is given a high weighting due to there not being many substitute goods, and how petrol forms a major part of a consumer’s disposable income.

Question 45

Give a limitation of using CPI to measure inflation rates of households.

Answer 45

CPI is meant to provide a weighted index of goods and services of all households, yet all households are different, with differing rates of inflation as there will be differing baskets of goods.

Question 46

Give another limitation of using CPI to measure inflation rates of households.

Answer 46

During measurement, the consumer prices index excludes mortgage payments and associated interest; mortgage payments include the biggest item of expenditure in a household. So, by excluding payments for the most used item in a household, this is an inaccurate method of measurement.

Question 47

State a third limitation of using CPI to measure inflation rates of households.

Answer 47

CPI doesn’t take into account the improvements of quality in goods and services; the prices of several electronic goods and services have fallen despite the stronger quality.

Question 48

Describe a limitation of using RPI compared to CPI.

Answer 48

During measurement, RPI excludes the top 4% income earners as it doesn’t believe these are typical households, while CPI includes households of all incomes.

Question 49

What are the three primary causes of inflation?

Answer 49

• Demand-pull inflation
• Cost-push inflation
• Growth of money supply

Question 50

What is demand-pull inflation?

Answer 50

Demand-pull inflation is a cause of inflation as a result of excessive amounts of demand; there is too much money from consumers, chasing too little supplies of goods and services.

Question 51

Give a cause of demand-pull inflation.

Answer 51

Reduced taxation; by reducing taxation, this will contribute to higher disposable consumer incomes, so consumers can afford more goods, causing an increase in demand. This will contribute to demand-pull inflation.

Question 52

Describe another cause of demand-pull inflation.

Answer 52

Another contributor to demand pull inflation is reduced interest rates; with less interest rates, consumers have more spending power on goods and services, increasing demand. This comes as as result of borrowing becoming more popular and saving money becoming less rewarding.

Question 53

Give a third cause of demand-pull inflation.

Answer 53

Increased certainty; with more certainty, this will increase confidence of consumers and firms, thus assisting consumers with their spending decisions and firms with their investment decisions.

Question 54

What is cost-push inflation?

Answer 54

Cost-push inflation is another cause of inflation, where firms respond to increasing production costs by increasing selling prices so the profit margin can be protected. Firms can absorb some of the increasing production costs but it will be too hard to absorb most of these costs, so the costs are passed on to the consumers in the form of higher prices.

Question 55

State a cause of cost-push inflation.

Answer 55

Wage increases; wages are the singular highest costs of production for a firm. If prices are increased, then the workers will ask for higher wages, and if higher wages come in the form of higher prices then the protesting for higher wages will rise. This causes a ‘wage-price spiral’.

Question 56

Give another cause of cost-push inflation.

Answer 56

Increased taxation; taxation on firms such as corporation tax, national insurance can largely increase costs of production, firms having to increase selling prices to save profit margins.

Question 57

Describe a third cause of cost-push inflation.

Answer 57

Natural disasters can temporarily or even permanently disrupt sources and routes of raw materials and supply. If supply starts to suffer, then costs can pile up.

Question 58

What is money supply?

Answer 58

Money supply is a measure of the amount or stock of money in an economy.

Question 59

What is narrow money and broad money?

Answer 59

Narrow money (known as M0) is a form of liquid money, mainly comprised of liquid notes and coins, while broad money (known as M4) consists of narrow money and more liquid assets as well; bank deposits.

Question 60

Give one method to increase the money supply.

Answer 60

The money supply can be increased through quantitative easing.

Question 61

State another method to increase money supply.

Answer 61

Reducing holding deposits will allow for more lending of money and hence, more liquidity.

Question 62

Give a general effect of inflation.

Answer 62

If wages and earnings of consumers remain constant and inflation occurs, then this can be very detrimental as consumers will slowly afford less and less goods and services. This comes as a result of a weaker real disposable income.

Question 63

Give an effect of inflation specifically on consumers.

Answer 63

Higher prices will result in consumers immediately spending their money on goods and services, so they can prepare with all the important goods before prices increase.

Question 64

Describe an effect of inflation on businesses/firms.

Answer 64

Due to inflation, the production/supply costs will increase, so to protect profit margins and supply, the business will pass some of the costs onto the consumers in the form of higher selling prices. This is done to help attain profits, so the firm can survive this inflation.

Question 65

Give an effect of inflation on government.

Answer 65

The government will task the Bank of England with maintaining the inflation rate target of 2% (±1%), and also it will adjust interest rates. Interest rates are adjusted primarily to maintain a price level, which will overall help reach the target inflation rate.

Question 66

List an effect of inflation on workers.

Answer 66

To maintain and redistribute their income, workers will begin demanding for higher wages. This will eventually result in a wage-price spiral where firms will continuously attempt to increase wages by just passing on increasing costs to consumers. The solution to this however, is for the Union to negotiate with employers for higher wage rates.

Question 67

Define unemployment.

Answer 67

Unemployment is the number of people in the labour force who are looking for work, may even have the suitable qualifications for work, but are unable to find work at a point in time.

Question 68

What is the level of unemployment?

Answer 68

This is the number of people currently unemployed.

Question 69

What is the labour force?

Answer 69

The labour force is a count of those who are economically active; this means workers who are willing and able to work.

Question 70

Define the rate of unemployment.

Answer 70

The rate of unemployment is the number of unemployed people as a % of the labour force.

Question 71

List two measures of unemployment.

Answer 71

• Claimant count

- Labour force survey

Question 72

Describe claimant count.

Answer 72

Claimant count is a measure of unemployment, measuring the number of people claiming Job Seekers Allowance (JSA).

Question 73

What is the labour force survey?

Answer 73

The labour force survey (part of the International Labour Organisation), is a measure of unemployment where a survey is conducted on a quarterly of all UK households (approx 40,000 households). This survey is compiled by the Office of National Statistics, used to measure employment in the UK population.

Question 74

What is JSA?

Answer 74

The JSA (Job Seekers Allowance), is benefits paid to unemployed people.

Question 75

State a limitation of claimant count.

Answer 75

People who are under 18 or over 60 don’t count in unemployment as they are either children or the elderly, who are retired.

Question 76

Give another limitation of claimant count.

Answer 76

Self-employed workers who are temporarily unemployed tend to not claim JSA.

Question 77

State a third limitation of claimant count.

Answer 77

Some people who claim JSA may already be employed in the black/shadow economy, but still claim benefits.

Question 78

Give an advantage of claimant count.

Answer 78

It is fairly easy to obtain data for claimant count; all you do is measure the number of those claiming JSA (Job Seekers Allowance), and there is no cost involved in collecting this data.

Question 79

Give another advantage of claimant count.

Answer 79

Claimant count is regularly updated on a monthly basis, so it is always up-to-date.

Question 80

Describe an advantage of the labour force survey.

Answer 80

The labour force survey is internationally recognised, making it more trusted for obtaining data.

Question 81

Give another advantage of the labour force survey.

Answer 81

The labour force survey has very accurate data analysis on results.

Question 82

List a third advantage of the labour force survey.

Answer 82

The labour force survey takes into account several trends in sectors.

Question 83

Give a disadvantage of the labour force survey.

Answer 83

The results of the labour force survey are very expensive to compile.

Question 84

Describe another disadvantage of the labour force survey.

Answer 84

Labour force surveys are vulnerable to extrapolation errors (errors in estimation of a certain trend continuing or remaining applicable).

Question 85

What is underemployment?

Answer 85

Underemployment is where workers can’t find a job which is suitable for their qualifications or supports the number of hours they are willing to work (this may cause the workers to work long-hours, further adding to stress).

Question 86

How is underemployment occuring in real life?

Answer 86

In the real world, certain graduates struggle to find careers which are of their graduate standard, causing them to instead work in low-skill jobs such as supermarket assistants.

Question 87

How else is underemployment occuring in real life?

Answer 87

Some workers are put on zero-hour contracts; this is where the workers are called in when they are absolutely required, rather than regularly going to work on a permanent contract.

Question 88

Give two factors which help measure the extent of the consequences of unemployment.

Answer 88

• The rate of unemployment, employment, and economic inactivity.
• The duration of unemployment, employment and economic inactivity.

Question 89

Who do the consequences of unemployment massively impact?

Answer 89

• The economy
• Businesses
• The unemployed

Question 90

What is structural unemployment?

Answer 90

Structural unemployment is a type of unemployment where, due to changes in the structure of the economy, the job market is significantly affected. For example, due to low-wage economies in Eastern Europe and Far East, the UK has experienced a shift towards the tertiary sector from primary and secondary sectors. This thus leaves high skilled workers finding it hard to gain employment as certain operations have moved elsewhere. Although workers can gain new skills for employment, they will have to also re-train which can be difficult and expensive.

Question 91

What is frictional unemployment?

Answer 91

Frictional unemployment is a short-term unemployment, where workers who relocate to a different country or change their career, may not have sufficient information about the job opportunities or job market in this new career or region. In every economy, regardless of how well-run it is, there will be some sort of frictional unemployment. This is because not all workers will be aware of the entire job market of their chosen career in a completely different nation.

Question 92

What is seasonal unemployment?

Answer 92

Seasonal unemployment is a type of unemployment, occuring when workers are unemployed at different times of the year. This is common in industries such as the farming industries and travel and leisure industry. This also happens when many workers are employed at busy periods such as Christmas or Black Friday. Seasonal unemployment can cause distortion of unemployment figures, causing these figures to be ‘seasonally adjusted’, where figures and fluctuations are smoothly adjusted.

Question 93

Explain cyclical unemployment.

Answer 93

Cyclical unemployment is a type of unemployment occuring when there is a negative output gap in the economic cycle. If the economy is in deep recession, the real disposable incomes of consumers will fall, so as a result the demand of goods and services will fall. This will cause firms to remove workers as there isn’t much demand for goods, causing cyclical unemployment. If the opposite occured where the economy recovered, then demand would rise and cyclical unemployment would fall.

Question 94

What is (cyclical) demand-side unemployment?

Answer 94

Demand-side unemployment is where aggregate demand decreases by shifting to the left from AD to AD1. The fall in demand could occur because of seasonal or frictional factors. This decrease in demand will result in a fall in real national output, decreasing the rate of economic growth, but also decreases the price level which reduces the inflation rate. However, even though the inflation rate decreases, the government will have to weigh up the pros and cons of the inflation rate decreasing but the rate of unemployment rising and the fall in real national output.

Question 95

Define real wage inflexibility (classical unemployment).

Answer 95

Real wage inflexibility is a cause of unemployment, where real wage rates are set above the equilibrium wage rates. This is related to excess supply of labour which largely surpasses demand for labour. As a result of this excess supply, workers will receive high wage rates which, if too high can be at risk of decreasing supply. To prevent this, the firms decrease demand for labour, causing unemployment.

Question 96

What is supply-side unemployment (structural, frictional and seasonal)?

Answer 96

Supply-side unemployment is a cause of unemployment consisting of a decrease in short-run aggregate supply (shift to the left in SRAS supply curve). As a result of this, this causes a fall in real national output Y-Y1, so the rate of economic growth is less. On top of that, the price level rises which will increase the inflation rate.

Question 97

Give an effect of unemployment.

Answer 97

Lost output is a major effect of unemployment; with unemployment, there is a huge wastage of economic resources, significantly decreasing the rate of economic growth. This causes the economy to be producing within the PPF, where there is inefficiency and unemployment.

Question 98

Give another effect of unemployment.

Answer 98

Lower living standards; as a result of unemployment, consumers won’t earn any wages so their real disposable income will be mainly weak. This will contribute to very weak living standards.

Question 99

Give a third effect of unemployment.

Answer 99

Unemployment can also result in social costs involving weaker finances; this is made worse if there is a family as marital stress can arise from the strain in family finances.

Question 100

What is the balance of payments?

Answer 100

The balance of payments is a record of a country’s trade/transactions with the rest of the world.

Question 101

Give the names of the three accounts of the balance of payments.

Answer 101

• Current account
• Financial account
• Capital account

Question 102

Give the four components for one of the accounts of the balance of payments.

Answer 102

• Trade in goods
• Trade in services
• Investment income
• Money transfers

Question 103

What is included in the trade in goods?

Answer 103

Trade in goods is one of the components of the current account in the balance of payments; this component includes all finished, manufactured goods, as well as raw materials and capital technology.

Question 104

What is included in the trade in services?

Answer 104

Trade in services is one of the components of the current account in the balance of payments; this includes several services such as tourism, logistics, consultancy, banking, healthcare, education and many more.

Question 105

What is included in investment income?

Answer 105

Net investment income is a component of the current account in the balance of payments; this includes interest, profits, dividends earned from transnational businesses and also includes income earned from owned assets abroad.

Question 106

What is included in money transfers?

Answer 106

Money transfers is a component of the current account in balance of payments. This consists of overseas aid, private transfers and debt relief.

Question 107

What is a surplus, in terms of exports and imports in the balance of payments?

Answer 107

A surplus occurs when the sum of exports of goods, services and investment income exceeds the imports.

Question 108

What is a deficit, in terms of exports and imports in the balance of payments?

Answer 108

A deficit occurs when the sum of exports of goods, services and investment income is less than the imports.

Question 109

Define trade in goods.

Answer 109

Trade in goods is a component of the current account; it measures the net exports (X-M) of visible goods. Traditionally, the UK has a large deficit on this trade in goods component.

Question 110

Why does the UK have a deficit on the trade in goods component of the current account?

Answer 110

The UK traditionally runs a deficit on the trade in goods component due to increased demand for consumer goods.

Question 111

Give another reason why the UK has a large deficit on the trade in goods component of the current account.

Answer 111

The UK runs a trade deficit on the trade in goods component because of its strong currency, which enables it to afford imports but makes its exports less attractive to foreign buyers.

Question 112

Give a third reason why the UK has a trade deficit on the trade in goods component of the current account.

Answer 112

The UK runs a trade deficit on the trade in goods component also because of the decline in the UK manufacturing sector, where outsourcing is currently occurring as the UK is experiencing a shift from the primary and secondary sectors towards the tertiary sectors. This is because of low wage economies in Eastern Europe and Far East.

Question 113

Define trade in services.

Answer 113

Trade in services is another component of the current account; it measures the net exports (X - M) of invisible items such as banking, tourism, insurance… . Traditionally, the UK has a large surplus on this component of the current account.

Question 114

Why does the UK run a large surplus in the trade in services component of the current account?

Answer 114

As a result of the UK shifting towards the tertiary sector from primary and secondary sectors, this has allowed it to specialize in provision of services.

Question 115

Give another reason why the UK runs a large surplus in the trade in services component of the current account?

Answer 115

Because of this specialization in provision of services, the UK is more experienced and successful in this sector, allowing it to provide high quality services at low costs. This is why London is a internationally renowned prime financial centre, with a high provision of services and major source of wealth and income.

Question 116

What is investment income (primary income)?

Answer 116

Investment income is a component of the current account, and it consists of profits, interest, or dividends earned from owned UK assets abroad. The profits, interest, or dividends from these assets are sent back to the UK, as a credit of investment income, contained within the current account. What is not investment income, are debit items from foreign investments done in the UK, as these are sent back to their foreign countries. On the current account there is a deficit on investment income.

Question 117

What are money transfers (secondary income)?

Answer 117

Money transfers are a component of the current account, and they consist of payments made or received by a government, to a country or from a country. Typically, money transfers come in the form of overseas/foreign aid to help out other countries or another notable example of money transfers, is payments for membership of the European Union (EU).
For the UK, taking into account its status with the EU and global economy, the UK currently runs a deficit for the money transfers section of the current account.

Question 118

Give a cause of a current account deficit.

Answer 118

Poor price and non-price competitiveness - Rising inflation than trade partners, low investment in capital or research and products which are weak in design, performance and branding, can weaken competitiveness of a country and contribute to a current account deficit.

Question 119

Give another cause of a current account deficit.

Answer 119

Strong exchange rate - a strong exchange rate can make imports cheaper but exports more expensive.

Question 120

Describe another cause of a current account deficit.

Answer 120

Recession in one or more trade partner countries - A recession occuring in one or more trade partner countries can be very bad as export prices are cut, and it will now be harder for the UK to sell to emerging markets due to this barrier.

Question 121

Give a fourth cause of a current account deficit.

Answer 121

Volatile global prices e.g. commodities - Commodities are raw materials and primary agricultural products which may be bought and sold. Exporters of primary commodities can be hit hard by falling global prices as they won’t be able to make much money from exporting, and importing countries are also hit hard as a result of increasing oil and gas prices.

Question 122

Why is there a persistant deficit on the current account?

Answer 122

Increased consumer demand for imported goods - As consumer spending rises, so will consumer demand for imported goods. Typically in the UK, we have a high propensity (tendancy) to consume imported goods, so improvements in economic growth combined with a rise consumer spending and demand, will overall lead to an increased and persistant current account deficit.

Question 123

Give another reason why there is persistant deficit on the current account.

Answer 123

Due to low wage economies, the UK manufacturing industry is in decline as primary and secondary industries have shifted to these low wage economies (in Middle East and Far East). As a result of this and increasing globalisation, the UK will find it hard to compete against these low-wage economies in manufacturing goods.

Question 124

State a third reason why there is a persistent deficit on the current account.

Answer 124

If the exchange rate gets too strong, then although imports become more affordable, the exports won’t be so appealing to foreign buyers so exports won’t be so competitive.

Question 125

What is an economical problem from a persistant trade deficit?

Answer 125

As a result of a persistant trade deficit, aggregate demand (AD) will decrease, causing the AD curve to shift to the left from AD to AD1. The fall in AD will decrease the rate of economic growth and GDP growth due to real national output decreasing. As GDP growth has fallen, this will cause a fall in living standards.

Question 126

Describe another economical problem from a persistant trade deficit.

Answer 126

A persistant trade deficit can also cause a decline in jobs from home-based industries, contributing to regional decline and structural unemployment.

Question 127

Give a factor of redressing the balance (regulating imports and exports).

Answer 127

One way to redress the balance is to invest in the supply-side of the economy. This can increase productivity, which will cause a rise in real national output and therefore the rate of economic/GDP growth will also increase. If productivity is further enhanced, then exports can also increase as a result of greater output.

Question 128

Give another factor of redressing the balance (regulating imports and exports).

Answer 128

Another method to redress the balance is to improve macro-economical variables, because this can encourage investment and domestic/economic growth. Also with this economic growth, the reliance on imports will fall.

Question 129

How are economies all interconnected through international trade?

Answer 129

Economies are all interconnected because economic activity in certain countries can affect the state of open economies.

Question 130

How else are economies all interconnected through international trade?

Answer 130

One way economies are all interconnected through international trade is through inflation. Inflation is where there is a weakening in the purchasing power of money, so as a result exports will become less appealing.