Section 5

Economic Development
 Bellwork
• In your opinion (and not from the textbook, there are no right or wrong
answers), why are some countries rich and other countries poor?
Some countries are rich because of natural resource endowments, land,
proximity to the sea, etc.
Human resources (East Asians generally are higher IQ and more productive
workers)
Education system and innovation (development of new technology. The
more technology you have, the easier it is to grow one’s economy)
• How much arable land area is there overall.
• Winning a major war
• Agricultural vs Industrialized
• Distribution of resources
 Standards of Living
• We have two primary measurements for living standards. GDP per capita
and Human Development Index
• Real GDP per capita is even better than GDP per capita because it
accounts for inflation
• The Human Development Index adds a few indicators on top of Real GDP
Per capita
 HDI (Human Development Index)
• The HDI will also include education, as measured by the average expected years of
schooling in the country, and health, as measured by life expectancy, in order to measure
living standards.
• So in total, it is a composition of real gdp per capita, number of years of education, and
life expectancy.
• You need to be able to explain why real GDP per capita by itself isn’t adequate to
describe living standards, what HDI is, and why adding life expectancy (health) and
average # of years of education is a valid way to improve GDP to reveal more about
living standards. We might also need to be critical of HDI and explain how it could be
improved.
 HDI imperfections
• HDI is still not a perfect measurement of living standards because it does
not include things like human rights, gender equality, income distribution,
environmental issues, or cultural differences.
• Some questions ask you to critically assess HDI. This means we need to
talk about how living standards can be measured with real GDP per capita,
how HDI expands upon these measurements of living standards, what is
good about HDI, but also what is bad about HDI and what sorts of
measurements of living standards are missing from HDI.
 Bellwork
• Why are there differences in living standards both between and within
countries?
Why are there differences in living standards
and income distribution?
• When we ask this question, we mean both between and within countries.
• Productivity levels: if either workers individually or as a group within a
country are more productive, we naturally expect them to receive a larger
share of total income
• Role of governments: tax systems can be set up differently to discourage
or encourage more fairness in the distribution of income
• Population size directly impacts living standards
 PPP
• It is for this reason that economists make use of purchasing power parity
(PPP) exchange rates when comparing countries’ GDP. These use an
exchange rate based on the buying power of currencies in their own
countries. They compare the amount of a country’s currency needed to
buy the same basket of goods and services with that of another country or
countries’ currencies
Why are there differences in living standards
and income distribution?
• Distribution of income can vary a lot between countries and can greatly
influence living standards. For instance, Thailand and China have fairly
similar GDPs per capita, but China has a much more equal distribution of
income and so living standards are higher for almost everyone.
• Regional income differences: Big cities vs country-side.
• Inflation
• Level of education
• Level of Freedom
Pg 297
 Poverty
Poverty on the individual level has obvious consequences, what about on the societal
level?
Hunger and malnutrition
Ill health and mortality from illness
Limited or lack of access to education and other basic services
Homelessness and inadequate housing
Unsafe environments
Social discrimination and exclusion
 Absolute poverty vs Relative poverty
• Absolute poverty is the kind of poverty where all of their income or working
hours are spent on food, clothing, and shelter. They are not able to afford
anything other than basic human needs (or they can’t put their labour toward
anything other than acquiring these)
• Relative poverty just means that somebody has a much lower standard of
living than an average member of their society. Somebody in Germany with
an apartment, a car, and a television may still be “poor”, but their basic
physical needs in addition to more are still met, even if they are much poorer
than average.
 Causes of poverty
• Unemployment
• Low wages or low gdp per capita country
• Illness and poor healthcare
• Low rates of literacy
• High population growth
• Poor infrastructure
• Low FDI
• High Government Debt
 More causes of poverty
• Overreliance on primary sector output
• Political corruption and instability
 The poverty trap
• A lack of infrastructure, technology, and capital is a cause of poverty. This can
be alleviated by higher investment spending (I in the GDP equation). This
requires savings, however, since most investment spending is done with
borrowed money.
• The supply of money to borrow comes from how much people saved money.
• In very poor countries, low income means that almost all of it is exhausted just
paying for physical necessities. This leaves nothing left over for savings, and
thus there is very little available lending. This leads to low investment
spending, and so incomes tend to stay low.
 How can governments alleviate poverty and
redistribute income
• Promoting Economic growth: By raising the overall standard of living we can likely
increase the standard of living for the poorest citizens
• Improving Education: A person’s education level is very positively associated with their
level of income and earnings, so providing more fair access to education tends to improve
the standards of living for the poorest.
• Providing more generous state benefits: This works by directly taking tax dollars and
spending them on programs benefitting the poor.
• Use of progressive income taxation systems can reduce tax burdens on the poor while
allowing more money to be collected from richer people to be spent on benefits for the
poor.
Population
 Factors that affect population growth
• A country might have an increase in its population either from
immigration or naturally through high birth rates (>2.1 births per woman
on average)
• This can then be influenced by the average age of the population (older
people in general are less fertile) as well as the level of economic
opportunities for young people.
• Net Immigration is when we have more people coming into our country
than we have leaving our country to go live somewhere else
• The birth rate is likely to be high when there is a young average aged
population in which women marry young, infant mortality rate is high,
women are not well-educated, most women do not work and it is cheap to
bring up children.
• In some countries, its very expensive to raise children. We can measure
this as what is the ratio of how much is spent on average to raise a child
from 1-18 to the average or median income in that country. We expect
birth rates to be lower in these countries
 Death Rate
• This obviously matters in determining the country’s overall population
growth rate.
• Countries that have low rates of alcohol consumption, smoking, and drug
use, healthier diets, higher levels of exercise and activity, and good health
care systems tend to have lower death rates.
 Net Migration
• Net migration is defined as the amount of people entering minus the
amount of people leaving a country.
• The factors that might influence this are somewhat obvious; what are the
living standards in the home country and abroad? What sort of incentives
does the country offer foreigners to come live there? Are the skills that
foreign workers have highly rewarded in this country?
 International
Specialization
 Lesson Objectives
• Today we’re going to talk about specialization and trade. We will focus on
understanding the following questions in the context of both reality and
current events as well as the IGCSE exam:
• 1. What determines patterns in international trade and what goods
countries specialize in?
• 2. What are the positive and negative impacts of globalization ( 经济全球
化） and international trade?
Bellwork (10-12 minutes, pages 333-336)
• Explain 1 advantage and 1 disadvantage of specialization and international trade for
consumers.
• 1. Specialization may also result in lower costs of production and the benefits of this
can be passed onto consumers.
• 2. For the consumers, the product will have good quality because it will enable
countries to be concentrating on one product and they’ll develop more skill in
producing the product.
• Do the same for firms.
• Explain what is meant by “absolute advantage” in the context of international trade
• Advantages: 1. Specialization may also result in lower costs of production and the benefits
of this can be passed onto consumers.
• 2. For the consumers, the product will have good quality because it will enable countries
to be concentrating on one product and they’ll develop more skill in producing the
product.
• Disadvantages: 1. If one country or a small number of countries maintain control over
most of the global market for the product and they use it to restrict supply and increase
price.
• 2. If consumers are buying products from foreign specialist those firms may not follow the
same health and safety standards as in the home country.
• Advantages for firms: The firm can specialize and they will experience
economies of scale; lower long run average cost can make them have a
higher market share.
• Disadvantage for firms: The firms could experience a fall in demand. If
more firms in other countries are more efficient at producing the product
or a substitute, people will buy the import instead of the domestically
produced good.
• Absolute advantage: Is when one country can produce a good or service
more efficiently than another. You might also see this defined as “one
country can make more of a good with less inputs”.
• “You could say…that globalization, driven not by human goodness but by
the profit motive, has done far more good for far more people than all the
foreign aid and soft loans ever provided by well-intentioned governments
and international agencies.”
Paul Krugman, “The Magic Mountain,” New York Times,
January 23, 2001
• “The growth of the Internet will slow
drastically, as the flaw in ‘Metcalfe’s
law’—which states that the number of
potential connections in a network is
proportional to the square of the number
of participants—becomes apparent:
most people have nothing to say to each
other! By 2005 or so, it will become
clear that the Internet’s impact on the
economy has been no greater than the
fax machine’s.” – Paul Krugman
 Not exactly the master of prediction
• “Calling Trump the “mother of all adverse effects,” the Nobel Prize-
winning economist predicted that the GOP nominee’s
administration could quickly undo the progress that the markets
around the world have made in the eight years since the financial
crisis.”
 Bellwork
• Explain what is meant by specialization in the context of international trade
Specialization occurs when countries concentrate on the production on certain goods and
services because of resource endowments related to a specific good or service.
• Explain what is meant by absolute advantage and how it is different from comparative
advantage.
Absolute advantage is when a country can produce a product using fewer resources or can
produce something with higher quality or efficiency.
Comparative Advantage is what most of international trade is based on. This is when a
country can produce something at a lower opportunity cost.
• International specialization occurs when countries concentrate on the
production of certain goods or services because they have resource
endowments that are relatively more suited toward those specific goods
and services
• Resource endowments: The resources a country naturally has. Saudi
Arabia naturally has a lot of oil in its borders, China has lots of metals and
coal, South and Central American countries have a lot of high quality
coffee.
 Specialization Advantages
• Essentially, we have our country specialize in one good or type of goods, we lower
the amount of waste we engage in. By devoting resources to goods that we
specialize in exclusively and simply trading for the goods that we aren’t specialized
in, we can improve the overall amount of goods and services we can consume.
• We will also have higher worker productivity if our workers are only working on
the tasks to which the country is most suited overall. This may lead to higher wages
and salaries.
• We have higher productive capacity overall and our consumers can consume more
goods and services, as mentioned above.
 Specialization Advantages
• Economies of Scale: If we specialize very heavily in fewer goods and
services, the industries that produce those are going to become larger and
may benefit from the cost reductions granted by economies of scale.
• Improves competitiveness: Specialization helps enhance our global
competitiveness so we can often earn more money from international
trade. (it is likely to raise our export revenue and may only raise import
spending a little bit, so AD can increase through an increase in NX)
 Specialization Advantages
• Through specialization and trade, we often end up with a larger variety of
goods and services available to our consumers. We can access goods and
services that we otherwise don’t produce domestically.
 Bellwork
• Explain 2 advantages and 2 disadvantages of international specialization.
• For consumer’s international specialization can enable them to enjoy (a wider variety) of goods and services
at higher quality and lower prices. The living standards can be higher because of the aforementioned higher
product quality and lower prices and because of higher incomes due to higher productivity.
• For firms, firms become more dependent on other countries for the market of their products.
• Workers may suffer from structural unemployment; it’s harder for them to change skills if they’re specialized
in one field.
• Lack of variety (in domestically produced goods) for consumers
• What is an “MNC” and why might a country want many of them ？
• Multinational corporation or company most MNCs are public limited companies and they can increasing
employment, output, and tax revenue.
 Disadvantages of specialization
• Overspecialization can cause structural unemployment. Countries may
also suffer during times of crisis if they can’t rely on imports and haven’t
developed a domestic industry to produce something yet because they
were relying on specialization and importing what they don’t specialize in.
• Semiconductors and computer chips during Covid.
• Lack of variety for consumers: specialization tends to lead to standardized
and mass-produced goods.
 Disadvantages of specialization
• High labour turnover: Lots of workers may choose to leave jobs in search of
less boring work. Higher labour turnover means higher frictional
unemployment. Specialization will lead to more boring jobs that workers are
more likely to quit
• Low labour mobility: Workers will develop a more narrow skillset that applies
to only one specific industry and it’ll be hard to get workers for new industries.
• Higher labour costs: firms that employ workers with highly specialized skills
may need to pay them more.
Globalization, free trade, and protectionism
• Globalization is the process by which the worlds economies become more
interconnected and interdependent (what happens in other countries
affects us, what happens in our countries affects other countries)
• An increasing amount of the companies we buy our goods and services
are operating in many different countries. We refer to these as MNCs
(multi-national companies).
The costs and benefits of MNCs: Advantages

• Job creation: MNCs bring lots of higher paying employment opportunities to

their “host” country (the country where they are setting up a location)
• MNCs operate on very large scales and are most likely to benefit from
economies of scale relative to smaller local firms.
• By operating overseas, MNCs can earn more profit and this benefits the
country where the MNC comes from
• MNCs can mitigate risk by operating in many countries; if one country is doing
poorly, the MNC can make money in the other countries where it operates.
The costs and benefits of MNCs: Advantages
• MNCs can avoid trade restrictions like tariffs or quotas by operating in many
countries.
• MNCs can access new markets by location overseas and this might reduce
transportation costs.
• MNCs might choose to move or expand their operation in foreign countries to
benefit from lower rates of corppoarte taxes.
• MNCs can share their more advanced and modern technology and production
methods with local employees and improve the human capital of their host
country.
 Disadvantages of MNCs
• MNCs might be unethical and offer poor working conditions or low wages
for workers in low-income countries (though often still better working
conditions and higher wages than what that country’s businesses normally
offer)
• While jobs might be created for overseas countries, MNCs can force local
firms out of business. They may develop monopoly power as a result of
the aforementioned economies of scale and large market power
 Disadvantages of MNCs
• MNCs not operating in their home country often disregard the
environment and are more likely to create external costs.
 Bellwork
• Explain why a country might want to use a tariff. We might want to discourage the
purchase of imports in order to protect our domestic firms from having to compete with
overseas firms.
• What is a floating exchange rate and how is it different than a fixed exchange rate? A
fixed exchange rate is an exchange rate whose value is set at some specific price relative
to another currency. Floating exchange rates are those that can change frequently because
they are determined by market forces (supply and demand for that currency)
• What does it mean to devalue a currency? How is it different than currency depreciation?
Devaluation is when a government working with its central bank intentionally lowers the
value of its currency. Depreciation is when this happens due to market forces naturally.
 Protectionism
• Often times economies seek to protect their domestic industries from
competition with imports. They may decide to raise tariffs, quotas, and
embargoes to “block” imports from entering the country. This allows the
domestic firms to be shielded from needing to compete with imports.
• We import goods usually because they are produced at a lower cost in
another country and this means they are often priced at a point lower than
their domestically produced counterparts. By limiting the number of imports,
we force domestic consumers to give their business to domestic firms
 Protectionism
• If domestic firms are forced to compete with imports, its harder for them to make a
profit because domestic consumers will choose to buy the cheaper imports instead.
• Tariff: A tax places specifically on imported goods
• Quota: A limitation on the amount of imports
• Embargo: Forbidding all trade with another country
• Subsidies can also be a form of protectionism. By lowering the cost of production
for domestic firms, domestic firms can lower their prices in order to compete with
imports.
 Free Trade Benefits
• Free trade means that there is NO protectionism being used by any country.
They can both freely import and export goods among themselves.
• Access to resources. International trade enables producers and consumers to
gain access to goods and services they otherwise wouldn’t be able to get.
• Lower prices: As we allocate the production of goods to where they are
produced most cheaply, we see that prices will naturally fall
• Economies of Scale: Along with the above point, production will gravitate
toward the countries that have strong economies of scale in a particular industry
 Free trade benefits
• Greater Choices: We all have a wider range of goods and services to
choose from
• Increased market sizes for firms: Firms now have more potential
consumers, allowing firms to grow further if they are already large enough
to serve their own domestic market fully
• Efficiency gains
 Foreign Exchange Rates
• A foreign exchange rate is the price of one currency in terms of another
currency, for instance the price of USD in terms of RMB. We often
abbreviate this as “forex”
• When the price of our currency goes up, we say that it has “appreciated”.
If the price of our currency goes down, it has “depreciated”.
 Floating exchange rates
• This is where we simply allow the value of the currency to move freely
from demand and supply for the currency. There is no direct government
or central bank actions taken to fix the price at a certain level.
 Fixed vs Floating Exchange rates
• A fixed exchange rate is one where the price of the currency is set at a
certain rate and central banks cooperate with governments in order to
maintain the price of the currency at the same rate.
 How do fixed exchange rates work?
• Can a government just decree that the exchange rate will be set and punish people
who trade any other price? Not realistic.
• Instead, what they do is the central bank holds a very large amount of foreign
currencies and uses these to buy their own country’s currency when the price is too
low. This raises the demand for their own currency.
• If the country’s currency is ever too expensive, they simply sell more of their own
currency and buy foreign currencies.
• They can also raise or lower interest rates as a way of moving the price of their
own currency
 For country A maintaining a fixed exchange
rate
• Show what would happen if the price was 1 unit of currency A for 9 units
of currency B and we want the equilibrium price to be 1 unit of currency A
for 8 units of currency B. Explain what the central bank would need to do
and represent this using a demand and supply diagram using either
country’s perspective.
• If 1 GBP = 9.12116 YUAN, then 1 yuan MUST be 1/9.12116 GBP. Why
is this the case? What would happen if 1 yuan = 1/9.2 or 1/9 GBP?
• Arbitrage （套利）
 Important note
• When we refer colloquially to the “demand for a currency” or “supply of a
currency” we are referring actually to “demand for a currency on the
foreign exchange market” and “supply of a currency on the foreign
exchange market” ,NOT the money supply for the currency or demand to
hold that currency in liquid form.
 What drives demand for a country’s
currency?
• Chiefly, demand for the country’s goods and services by foreigners.
• How much do MNCs want to set up and invest in the country? If so, they
need to purchase a lot of the country’s currency.
• How profitable and attractive are the country’s financial investments? Can
an international investor earn a higher return by saving in the country’s
banks, buying stocks, or buying bonds? If so, they will demand more of
the country’s currency.
 What drives the supply of a currency?
• How much do our country’s residents demand foreign goods and imports?
If they demand a lot, it will cause our residents to supply a lot of the
currency on forex markets.
• How much do our country’s residents want to buy foreign investment
products?
• How much do our country’s companies and MNCs based in our country
go set up and invest in other countries?
• A change in the exchange rate, besides affecting exports and imports, may
influence economic growth, employment and inflation. A fall in the
exchange rate, by lowering export prices and raising import prices, is
likely to increase demand for domestic products. This rise in aggregate
demand can increase output and employment of the economy, if it is not
operating at full capacity initially. Figure 38.4 shows real GDP rising from
Y to Y1 as a result of a rise in net exports.
• Imagine the RMB depreciates relative to the GBP. What happens to the price of UK Imports for
Chinese people? They get more expensive. What happens to the price of Chinese imports for
UK firms (and maybe consumers?) They get cheaper.
• What do you think happens to the value of net exports for both countries? China’s net exports…
are likely (but not guaranteed) to increase. If exports from China in the UK got cheaper for
people in the UK, what happens to Export revenue for China? Likely to increase (but not
guaranteed)
• Remember that Net Exports is Export Revenue minus import spending. If import spending fell
because import price increased, then net exports has increased. At the same time, export revenue
was increasing and with Export revenue up and import spending down, then net exports is
higher.
• Bellwork Monday: Explain how a depreciation is likely (not guaranteed)
to benefit an economy. Do the same to explain why appreciation of a
country’s exchange rate is likely to hurt an economy.
• The currency depreciates which means the value of the currency has
decreased. It now takes LESS of a given foreign currency to buy our
currency if our currency has DEPRECIATED. Example: Let’s say that
before it took 7 RMB to buy 1 USD, and now it takes 8 RMB to buy 1
USD. This means our currency has depreciated.
• If our currency has depreciated, what happens to the price of exports we sell overseas? Foreigners
now need to use LESS of their own currency to buy ours, therefore the prices of exports have
decreased. When the prices of our exports decrease, export revenue will likely increase. An increase
in export revenue means that AD=C+I=G+ (Export revenue-import spending) will increase and shift
to the right. This is likely good for an economy.
• Similarly, in the same case of depreciation, what happens to the price our citizens pay for imported
goods? They will increase because it now takes more of our currency to buy one unit of the foreign
currency, making imports more expensive. If imports are more expensive, what is likely to happen to
overall import spending? Import spending is likely to fall. Not only that, but consumption is likely to
rise as some of the spending that was originally spent on imports is instead spent on domestically
produced goods so “C” in the aforementioned GDP equation is likely to increase as well. This creates
additional pressure on AD to rise and shift to the right.
• Now lets look at appreciation. If our currency appreciates what happens to the amount of
my currency I need to use to buy foreign currencies? It decreases. This will make imports
cheaper and exports more expensive.
• As a result, we’re likely to have HIGHER import spending, LOWER consumption, AND
less export revenue. All of these together will decrease AD, which is likely bad but not
always.
• AD=GDP=C+I+G+ (Export Revenue - Import spending)
• In the case that the exports or imports are inelastic (oil, natural gas, steel, semiconductors,
computer chips etc) then the relationship is reversed; appreciation causes MORE export
revenue and depreciation causes less.
 Advantages of fixed and floating exchange
rates
• An advantage of a floating exchange rate is that it may help to eliminate a
gap between export revenue and import expenditure. If demand for
imports rises whilst demand for exports falls, supply of the currency will
rise (as individuals and firms sell it to buy foreign currency) and demand
for the currency will fall. This will lower the value of the currency and
hence reduce export prices and raise import prices. These changes may
make export revenue and import expenditure balance.
• Any change in the exchange rate causes a change in net exports. It will result in higher
exports and lower import spending. This as a result means we have more demand for
our currency which is undoing the initial change we had (which was depreciation).
• Similarly, if our currency appreciates, it causes more import spending and less export
revenue which leads to our currency being less demanded and thus undoing the initial
appreciation.
• In other words, whenever we have a floating exchange rate, changes are “self-
correcting”, and tend to cause a sequence of events such that the currency value is still
relatively stable. Not only that, it also keeps the value of net exports relatively stable.
• The main disadvantage with a floating exchange rate is that it can
fluctuate, making it difficult for firms to plan ahead. Speculation may
cause significant changes in the price of a currency. A large depreciation
may result in a rise in the country’s inflation rate.
 Advantages and disadvantages of a fixed
exchange rate
• The main advantage of a fixed exchange rate is that it creates certainty.
Firms that buy and sell products abroad will know the exact amount they
will pay and receive in terms of their own currency, if the exchange rate
does not change.
• A fixed exchange rate, however, has a number of disadvantages. It can
mean that a central bank has to use up a considerable amount of foreign
currency to maintain its value. If the exchange rate is under downward or
upward pressure, it may also have to implement policy measures which
may conflict with its other government objectives. For example, a central
bank may raise the rate of interest to reverse downward pressure on the
value of the currency. A higher interest rate may cause unemployment and
slow down economic growth as it may reduce aggregate demand
 3 part question
• A. Explain two ways a central bank can prevent a rise in a fixed exchange
rate. (4)
• B. Assuming that Country X and Country Y are trading partners who
import and exports lots of goods and services from one another, analyse
how a recession in Country X could affect Country Y’s floating exchange
rate. (6)
• C. Discuss whether or not a country would benefit from switching from a
fixed to a floating exchange rate. (8)
 Bellwork
• What is the current account and what are the three parts included in it?
• The current account shows the income received by the country and the expenditure it does dealing
with other countries.
• One part of the current account is Trade in Goods. How much revenue do we get for selling our
physical goods abroad minus how much do our citizens spend on physical goods produced overseas.
• Trade in services, self explanatory.
• Primary and Secondary Income: Primary income is when our citizens earn money from working in
foreign companies or from foreign investment minus the income earned by foreigners who work in
our country’s companies or own investments in our country. Secondary income is transfers of money
unilaterally not in return for anything else.
 The current account of the balance of
payments
• The balance of payments (BOP) is a record of transactions that a country
does with other countries. It includes a lot of different components related
to financial and physical investment, charity, remittances, etc. But we are
going to focus really on only one part: The current account
• The Current Account: = The country’s balance in visible (physical goods)
trade + balance in invisible trade (services) + balance of income
• For all of these, we take the amount of money our citizens earned and
subtract out the amount of money foreigners earned.
 Trade Balances
• Visible is trade in all physical goods, including consumer goods, capital
goods, raw materials, natural resources, etc.
• We take the amount of export revenue we earn from exporting things that
fall into this category and subtract the amount of import spending we have
for things that fall into this category.
• Invisible would correspond to services, follows same rule as above.
 Income
• If we just take trade in goods and services, we have the same as net
exports. What differentiates the current account from NX is income.
• Primary income: How much income to our citizens earn from work at
foreign companies or any income they earn from physical or financial
investments in foreign countries. Take that and subtract the amount of
income that foreigners earn from work at our companies or any incomes
in physical or financial investments in our country.
• Secondary Income: This is transfers of money, goods or services which
are sent out of the country or come into the country, not in return for
anything else. It essentially covers gifts. Items include charitable
donations, workers’ remittances (money sent by migrant workers to
relatives abroad and money received by relatives from migrant workers in
other countries) and aid from one government to other governments.
Workers’ remittances are a large item in some countries’ secondary
income.
 Current Account
• So we take the three items: Trade balance in goods, trade balance in
services, and balance in income. We sum them up and we have the current
account balance.
• We can have either a positive or negative value from doing this; positive
indicates we have a surplus while negative indicates we have a deficit.
 Debits vs Credits
• Credits indicate that we have a positive entry in the current account; it
means it is adding money.
• Debits indicate that a transaction is a negative entry in the current account;
 What can cause changes in imports and
exports?
• The country’s inflation rate. If the country has a relatively high rate of inflation,
domestic households and firms are likely to buy a significant number of imports.
The country’s firms are also likely to experience some difficulty in exporting.
• The country’s exchange rate: Typically depreciation will cause positive changes in
current account, appreciation will cause negative movement in current account.
• Productivity. The more productive a country’s workers are, the lower the labour
costs per unit and the cheaper its products. A rise in productivity is likely to lead to
a greater number of households and firms buying more of the country’s products –
so exports should rise and imports fall
 What can cause changes in imports and
exports?
• Quality of goods: If our goods are higher in quality, we expect to see more
of our exports being purchased.
• Domestic GDP: If incomes rise at home, more imports may be bought.
Firms are likely to buy more raw materials and capital goods, and some of
these will come from abroad. Households will buy more products, and
some of these will be imported.