IGCSE Development Studies: Specimen Questions with Answers 52 - 53 of 98

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Balance of Trade

Question 52 (2 of 7 Based on Passage)

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State the government՚s role in promoting trade.

Explanation

Government plays a solid role in promoting international trade. Importing same type of product for will pose a threat to domestic business. Government can influence trade through different measures-

  • Tariff: A tariff is a form of tax charged by the government to protect the domestic business from imports or foreign competition. Due to tariff domestic firms can charge higher prices for the goods and producing the output. Tariff leads to higher employment in the protected industries in comparison to the unprotected industries.
  • Quotas: Through quotas government restrict the quantity of imports from other nations. It is a method used by these government to protect the domestic industries from competition from foreign countries.

Question 53 (3 of 7 Based on Passage)

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Suggest three reasons for deficit in balance of trade.

Explanation

Deficit in the balance of trade occurs when the value of imports of goods and services and investment increases than the total value of exports of goods, services, and investment. There are several factors that cause deficit in the balance of trade:

  • Not enough domestic companies involved in exporting of goods and services.
  • If the value of the domestic currency is over-valued imports will be cheaper thus the value of exports will be greater.
  • If the national income increase people will tend to spend more on the consumption of goods and services and if domestic producers are not able to meet the domestic demand then goods and services will be imported from foreign countries.
    • Domestic companies are not internationally competitive.
    • Over rating of the country՚s currency.
    • Government՚s budget deficit.

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