Macroeconomic issues (BOT deficit/surplus)

Question 1

what is BOT

Answer 1

value of exports of g&s - value of imports of g&s

Question 2

BOT deficit can be due to:

Answer 2

changes in:
1. global demand conditions
2. international competitiveness
3. exchange rates

Question 3

how does higher rates of inflation relative to trading partners cause BOT deficit?

Answer 3

consumers in a country with higher domestic inflation relative to trading partners will switch from domestic to imported goods. at the same time exported goods are also more expensive and qtydd falls. M increase, X fall

Question 4

how does loss of comparative advantage cause BOT deficit?

Answer 4

decrease in country’s efficiency/ increase in competitors’ efficiency, thus export revenues are likely to fall. X fall

Question 5

how does development in new niche sectors cause BOT surplus?

Answer 5

growth of these sectors contribute to improvement in services balance on invisible trade acc

Question 5

how does undervalued exchange rate cause BOT surplus

Answer 5

exports become cheaper and imports are more expensive

Question 6

consequence of persistent BOT deficit
ON CONSUMERS

Answer 6

BOT deficit could cause a refunction in competition in the domestic market and prices rise, thus lowering SOL

Question 7

consequence of persistent BOT deficit
ON FIRMS

Answer 7

market shares of domestic firms dwindle over time and cut down on I. they may also shut down/leave the industries in LR

Question 8

consequence of persistent BOT deficit
ON GOVT

Answer 8

country may be pressured to devalue its currency to boost exports

Question 9

why is devalueing a currency undesirable?

Answer 9

fall in currency = reduce country’s ability to import from overseas thus lowering SOL and Potential Growth

Question 10

consequence of persistent BOT surplus
ON CONSUMERS

Answer 10

X and I increasing thus NY and GDP increases,UNE falls. however if near full employment would cause DPI

Question 11

consequence of persistent BOT surplus
ON FIRMS

Answer 11

fall in demand for x, thus decrease I and production

Question 12

Labour productivity and EG

Answer 12

high labour productivity =
fall in per unit labour COP
rise in profit margin
rise in atttractiveness to investors
rise in FDI, thus AD and GDP and thus EG

Question 13

labour productivity and inflation

Answer 13

increase in labour productivity =
higher output, rightward shift in LRAS, higher GDP

Question 14

labour productivity and BOT

Answer 14

higher labour productivity
= fall in P of dom goods
consumers switch from M to dom goods