Lecture 2A

Question 1

What is the effect of inflation on a country’s international trade flows?

Answer 1

• rising inflation hurts a country’s trade balance because consumers turn to cheaper products overseas
• inflation increase –> imports increase & exports decrease because local products go up

Question 2

What is the effect of national income on a country’s international trade flows?

Answer 2

• a rise in a country’s national income causes its imports to rise, its exports to fall (sellers divert potential exports back to customers at home) so that the country’s trade balance deteriorates (becomes less positive or more negative_
• imports increase because more buying power
• can go down in imports if they are inferior goods

Question 3

Trade balance

Answer 3

= exports - imports

Question 4

income elasticity of demand

Answer 4

= % change in quantity of imports / % change in real income
E > 1   superior good (ex: yacht)
E = 1   unitary elasticity of demand
E < 1   inelastic demand
E < 0   inferior goods (ex: spam)