IGCSE Development Studies: Specimen Questions with Answers 55 - 56 of 98

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Passage

Balance of Trade

Question 55 (5 of 7 Based on Passage)

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What are the problems associated with current account deficit?

Explanation

Problems of Current Account Deficit Are

  • Foreigners have greater claim on domestic assets.
  • Large deficit could be unsustainable, if financed from abroad.
  • It may indicate unbalanced economy- focused on short term consumption rather than longer investment in export sector.
  • Large deficit could cause depreciation in the exchange rate and cost push inflation.
  • For countries with fixed exchange rate it may indicate they have become uncompetitive due to higher inflation and if exports over-priced reduce domestic demand.

Question 56 (6 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.

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