Answer to Question #271683 in Macroeconomics for mimy

Question

1. Analyze how an unfavorable movement in the terms of trade is likely to affect a country,

a.     Balance of payments on current account    (4 marks)

b. Living standards.                                    (4 marks)

Answer 1

Solution:

1.). An unfavorable trade balance is an economic condition in which the number of goods and services purchased by the country (imports) exceeds the number of goods and services sold by the country (exports).

 

a.). Unfavorable movement in terms of trade will result in a deficit in the balance of payments on the current account. A current account balance deficit indicates that the government and economy are net debtors to the rest of the world. It invests more than it saves and borrows from other countries to meet its domestic consumption and investment needs.

 

b.). Unfavorable movement in terms of trade will lower the living standards of a country. This is due to the fact that a country will tend to import more products than it will export. As a result, its domestic businesses lack the experience required to produce value-added products. Rather, its economy becomes increasingly dependent on volatile global commodity prices. This eventually leads to higher consumer prices, higher unemployment, lower GDP growth, reduced international trade, and lower economic growth.