Th4.1: Short Term Causes - Deficits and Surpluses Flashcards
What can deficits and surpluses be caused by?
high levels of consumer demand
If real household spending grows more quickly than the supply side of the economy can deliver, the only way of meeting this demand is…
by importing those goods and services
What do high incomes in a country lead to?
high imports but have no effect on the level of exports
Refer to PP
Look at Graph 18. The diagram shows that an increase in income from Y1 to Y2 affect imports and exports how?
causes imports to rise but exports to stay constant, leading to a fall in the balance of trade
Refer to PP
Look at Graph 18. What is the balance of trade at Y1?
imports = exports and so the balance of trade is 0
Refer to PP
Look at Graph 18. What is the balance of trade like at Y2?
there is a balance of trade deficit
Why does the deficit tend to grow when the economy enjoys a period of consumption led growth?
Research suggests that UK consumers tend to have a high-income elasticity of demand for imports
Moreover it can be caused by a strong exchange rate which…
reduces the UK price of imports and leads to an expenditure-switching effect away from domestically produced output
The high value of the pound improves the… and allows us to…
improves the terms of trade between the UK and other countries, allowing us to buy and consume more imports with each
How does a high value pound affect exports?
it increases the price of exports and so leads to a fall in the value of exports, assuming PED is inelastic
What will a high level of relative inflation do?
decrease exports since it will increase their price compared to goods produced by other countries
What are three potential short term causes of deficits and surpluses?
high levels of consumer demand
strong exchange rate
high relative inflation
