Th4.1: ^^^ Current Account of Balance of Payments

Question 1

What does the Marshall-Lerner condition state?

Answer 1

that the sum of the price elasticities of imports and exports must be more than one (i.e elastic) if a currency devaluation is to have a positive impact on the trade balance

Question 2

Refer to PP

Look at Graph 19. What does the J-curve show?

Answer 2

how the current account will worsen before it improves

Question 3

Why is this?

Answer 3

people will not immediately recognise that British exports are cheaper and it will take a while to find a source for them, whilst UK consumers will not see imports are more expensive straight away and may be unable to switch

Question 4

Draw and label the J curve

Answer 4

actually do it

Question 5

Demand tends to be inelastic in the short run, therefore the amount sold of each will…

Answer 5

will stay the same but the price of exports will fall, so the value will fall, and the price of imports will rise so the value will rise

Question 6

Why will the current account deficit fall in the long run?

Answer 6

as demand becomes more elastic