Discussion Questions – the Net Exports Effect
In theory a rapid rate of growth might be at the expense of the current account of the balance of payments. When total demand is extremely high and domestic producers are not able to meet all of this demand, so the demand for imported goods and services will increase leading to an increase in the trade deficit. This tradeoff is evident when the main source of rising demand is a higher level of consumer spending. Consumers tend to consume more goods by importing them. Nonetheless, as their incomes increases, so does the demand of imports rises. Therefore, the tradeoff is worsened by importation. However economic growth can be achieved without a worsening of the balance of payments in goods and services. The causes of a trade deficit are not solely cyclical but there are structural explanations too. indeed in the long run, the main causes of imports out-pacing exports relate to the competitiveness of local producers in their own domestic markets and when trying to export overseas.
On the other hand, during an economic expansion interest rate will go down. For instance, when the US economy is expanding interest rate ought to go down while the value of the local currency which in the United States is the dollar should decrease. On the other hand, slower economic growth reduces the demand for money since individuals and businesses are less likely to take out loans to finance projects and purchases. Lower demand for loans means prices in this case, interest rates fall in kind.
Lastly but not least, during economic expansion the dollar is affected. One of the ways the dollar is affected is by decreasing it value. For instance, when the US economy grows faster than that one of its trading partners, the demand for imported goods and services by Americans would rise relative to the foreign demand for US exports, and the dollar weaken to restore balance in trade. If the US economic growth lags behind that of its trading partners, the demand of imports by Americans