SAJC 2024 H2 Econs Favourable BOT Students Uploaded

ST ANDREW’S JUNIOR COLLEGE JC2 H2 ECONOMICS 2024 FAVOURABLE BALANCE OF TRADE We have thus far looked at the macroeconomic objectives of achieving economic growth, price stability and full employment. These are commonly referred to as the internal macroeconomic goals of a government. When these goals are achieved, there is internal economic stability within the country. In this set of notes, we turn our attention to the external macroeconomic goal of governments – achieving a favourable balance of trade position. A favourable balance of trade position is achieved when there is avoidance of large and persistent balance of trade deficit or having an improved balance of trade surplus. We will study why governments would want to pursue such a goal as well as the issues and consequences of non -attainment of this goal. We will then study the various policies that can be adopted by governments to achieve the desired external equilibrium. Important concepts and tools and analysis  Balance of trade surplus and deficit  Short term capital flows  Long term capital flows – Foreign Direct Investment  Balance of Payments Account components – Current account, capital and financial account* *Students are only expected to have an awareness of the components of the Balance of Payments. Key questions to consider 1. What is the balance of payments and how is the balance of trade related to it? 2. What does having a favourable balance of trade position mean? 3. Why do governments want to have a favourable balance of trade position? 4. What causes an unfavourable BOT position? 5. What happens when countries do not achieve a favourable balance of trade position? 6. How do governments try and achieve a favourable balance of trade position?

St. Andrew’s Junior College Economics Department 2024 2 Contents 1. The Balance of Payments ................................................................................................................................................ 3 1.1. Overview of the Balance of Payments Account ................................................................................................. 3 1.2. Structure of BOP ...................................................................................................................................................... 4 2. Balance of Trade Equilibrium ......................................................................................................................................... 7 3. MACROECONOMIC AIM: FAVOURABLE BALANCE OF TRADE POSITION .......................................................... 7 3.1. Benefits of favourable BOT Position .................................................................................................................... 7 4. MACROECONOMIC ISSUE: BALANCE OF TRADE DEFICIT ....................................................................................... 8 4.1. Causes of a Balance of Trade Deficit ................................................................................................................. 8 4.2. Consequences of a persistent BOT Deficit ........................................................................................................ 11 4.3. Is a BOT deficit always a cause for concern? .................................................................................................. 12 5. MACROECONOMIC POLICIES: CORRECTING A BALANCE OF TRADE DEFICIT ................................................ 15 5.1. Expenditure-Reducing Policies ............................................................................................................................. 15 5.1.1. Contractionary Fiscal Policy ............................................................................................................................ 15 5.1.2. Contractionary Monetary Policy .................................................................................................................... 16 5.1.3. Evaluation of Expenditure-Reducing Policies ............................................................................................... 16 5.2. Expenditure-Switching Policies ............................................................................................................................ 17 5.2.1. Exchange Rate Policy ....................................................................................................................................... 17 5.2.2. Limitations of Exchange Rate Policy .............................................................................................................. 17 5.2.3. Import Controls (otherwise known as protectionist measures) .................................................................. 19 5.2.4. Limitation of Import Controls Policy ............................................................................................................... 19 5.3. Supply-Side Policies (to improve export competitiveness) ............................................................................ 20 5.4. Limitation of Supply-side Policies ....................................................................................................................... 21 6. Macroeconomic Problem: BOT Surplus ....................................................................................................................... 22 6.1. Causes of a Balance of Trade Surplus .............................................................................................................. 22 6.2. Consequences of a Balance of Trade Surplus ................................................................................................. 24 7. Conclusion ......................................................................................................................................................................... 26 8. Annex A ............................................................................................................................................................................ 27 8.1. OTHER CAUSES OF A BOP DISEQUILIBRIUM .................................................................................................. 27 8.1.1. Capital & Financial Account Disequilibrium ................................................................................................. 27 9. Annex B – ‘Dutch Disease’ ............................................................................................................................................. 30

FAVOURABLE BALANCE OF TRADE POSITION St. Andrew’s Junior College Economics Department 2024 3 What is the balance of payments and how is the balance of trade related to it? 1. The Balance of Payments Before diving into why and how governments achieve a favourable balance of trade position, we need to know what the balance of trade is . The balance of trade is a component of the Balance of Payments (BOP). BOP is a much broader concept that includes the balance of trade in goods, the balance of trade in services, balance of primary and secondary income, as well as balance of payment on capital and financial account. While it sounds rather overwhelming, do not panic! As part of your syllabus, you only need to know the components of the balance of payments and focus on the balance of trade. 1.1. Overview of the Balance of Payments Account What is the balance of payments? Let’s look at the definition. The Balance of Payments (BOP) is a summary record of all the international transactions between the residents of a country and the rest of the world over a period of time, usually one year. Transactions that a country makes with the rest of the world gets recorded in one of the accounts with the BOP. So, how are transactions categorised? The