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SELF-ASSESSMENT TASK
4.11
In recent years there has been less use made of
tariff s and quotas to protect domestic industries but
a rise in the use of other ways of reducing imports
and increasing exports. Th
ese include government
subsidies and the provision of loans on favourable
terms from state-owned banks.
In 2012 a trade dispute broke out between China
and the USA. Th
e USA imposed tariff s on Chinese
solar-panel exporters claiming they were receiving
government subsidies to engage in dumping. Th
e
Chinese threatened to retaliate by imposing tariff s on
a range of American imports. Eventually the dispute
was settled with the Chinese producers agreeing to
sell the solar panels at an agreed minimum price.
1
Why might favourable loans to exporters be
regarded as a form of trade protection?
2
Why is dumping regarded as unfair competition?
3
Explain why government subsidies to exporters
may not increase exports.
111
SUMMARY
Cambridge International AS Level Economics
In this chapter it has been shown that:
■
Aggregate demand is total spending on goods and
services produced in an economy at diff erent price
levels.
■
The aggregate demand curve is downward sloping.
■
Aggregate supply is total output in an economy at
diff erent price levels.
■
One of the causes of a shift to the left of the short-
run aggregate supply curve is an increase in costs of
production.
■
The long-run aggregate supply curve will shift to
the right if the quantity and/or quality of resources
increases.
■
Macroeconomic equilibrium is achieved where the
AD
and
AS
curves intersect.
■
The general price level in an economy can be
measured by means of a weighted price index.
■
Inflation can be caused by increases in aggregate
demand (demand-pull inflation) or increases in
aggregate supply (cost-push inflation).
■
Among the costs of inflation are a loss of international
competitiveness, a random redistribution of
income, menu costs, shoe leather costs, fiscal drag,
discouragement of investment and inflationary noise.
■
The benefits of inflation include stimulating output,
reducing debt and preventing unemployment.
■
Inflation is likely to have more of an adverse eff ect if it
is high, accelerating, unstable and caused by cost-
push factors.
■
Deflation may be caused by a decrease in aggregate
demand or an increase in aggregate supply.
■
The balance of payments is a record of a country’s
international transactions and is composed of the
current account, the capital account, the financial
account and net errors and omissions.
■
A current account deficit may be more serious if it is
caused by structural problems as in this case it will
not be self-correcting.
■
A financial account deficit may be a cause for concern
if it is the result of a lack of confidence in the economy.
■
Current account disequilibrium can aff ect economic
activity and the exchange rate.
■
A floating exchange rate is determined by
demand for and supply of the currency whereas
a fixed exchange rate is set by the government
and a managed float by both market forces and
government intervention.
■
A floating exchange rate has the potential advantages
of eliminating current account deficits, avoids the need
for reserves and is not a government target, but it does
not provide the certainty of a fixed exchange rate.
■
A floating exchange rate may rise if demand for
exports increases, demand for imports falls, the
country attracts more investment and currency
dealers speculate that the value will rise.
■
A fixed exchange rate is maintained by the central
bank buying and selling the currency and changing
the rate of interest.
■
A rise in the exchange rate may reduce net exports
and aggregate demand and produce a current
account surplus.
■
The Marshall-Lerner condition states that a fall in the
exchange rate will only improve the current account
position if the combined price elasticities of demand
for exports and imports is greater than 1.
■
A rise in the exchange rate can cause a reverse
J-curve eff ect.
■
The terms of trade is a measure of the ratio of export
and import prices.
■
A fall in the exchange rate will worsen the terms of
trade.
■
Absolute advantage and comparative advantage
emphasise the benefits of free trade.
■
Free international trade can increase output, lower
prices, increase choice, raise employment.
■
Countries may form trade blocs, which include free
trade unions, customs unions and economic unions.
■
Membership of a trade bloc can increase trade or
divert trade away from more eff icient producers to
less eff icient producers.
■
Among the methods of protection are tariff s, quotas,
exchange control, subsidies, embargoes, voluntary
export restraints and excessive administrative burdens.
■
Among the motives for imposing trade restrictions are
to protect trade restrictions, to slow down the decline
of sunset industries, to protect strategic industries,
to improve the terms of trade and to improve the
balance of payments position.
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