We are advisors to the president. The nation is experiencing the following:
It has high unemployment which stems from an insufficient use of resources.
It faces a current account deficit.
It has a capital account surplus.
The technology level is low
The infrastructure level is low.
What policy recommendations would we offer to cure the aforementioned maladies?
Note, these policy recommendations should be complementary to one another, or if there is some contradiction, we should advise a sufficient number to address all of them.
Education and training can be offered to the citizens of the country to reduce structural unemployment, which is the natural occurrence of unemployment. Education and training can also solve the low levels of technology and infrastructure. The exchange rate in the country can be devalued to offset a current account deficit. Devaluation, in this case, means that the exports are made cheaper than the exports out of the country. The country can also ensure that the domestic products and commodities are taxed less than the foreign and imported goods. The measures can also be put in place to address the surplus in the capital account.
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The first theory which developed chronologically to explain trade was the one based on factor endowments. Explain what factor endowments are and how it leads to comparative advantage and commerce among nations.
The factor endowments are the amounts of capital, land, labor, and entrepreneurship that a country has in its possession. Different nations across the world have different factor endowments, and they are allocated differently. The following are how the factor endowments lead to a comparative advantage. Firstly, the factor endowments have an impact on the amount of opportunity cost, which is involved in developing particular goods. That grows trade in that the countries will eventually have to outsource what they do not have.
Another theory of international trade is that nation's trade based on demand rather than cost/supply. Discuss this theory, apply it to at least two cases and mention its chief advocates. Is it supported by the empirical evidence?
The demand for the commodities in a nation determines their cost in the country. In a small way, the supply of the products also influences their price. Demand and supply forces in economics work antagonistically. One case that bases demand as influential in international trade is the printing of currency in the United States of America. The demand for the money is brought about by the depletion of the currency's supplies in the international market. The other case is Bolivia's importation of goods. The country only imports products according to the actual market requirements. Shreds of evidence in the different financial capabilities of the countries involved back the arguments.
Elucidate structural deficit reasons.
The structural deficit comes up when there is a repeated deficit case on a budget in a given country. The first reason for the occurrence of a structural deficit is aging of the population. The working class of the country tends to withdraw income from the country as they retire if no many young people are working. The second reason is excessive spending by the governments of the nation that is way beyond the revenue.
What are the right policies to combat structural deficits?
Structural deficits can be combated by increasing the taxation levels in a country. The increased tax levels amass more money to settle the budget deficits. The other method of battling structural deficit is to cut government spending. Some of the unnecessary projects can be halted to allow the government to concentrate on only the essential projects to save money and offset the deficits.
The US was the biggest creditor nation 40 years ago. It has now become the biggest debtor country approaching a debt level of $5 trillion. Explain.
Fundamentally, the United States of America has reduced the number of exports that it used to include in its trade with the other countries in the world. That translates to low income for the country pushing it into debt. The dollar has been a highly unstable currency in the recent past. Owing to the dynamism of the United States dollar, several investors have been discouraged to invest in the United States of America.
Describe the relative price effect of the price-specie flow mechanism.
Under the price-specie flow mechanism, a country with a favorable balance of trade has commodities flowing into the country due to its favorability. Such a country can have high revenues due to the inflow of revenues. The inflow of commodities and currencies reduces their relative prices due to their adequate supply into a country.
Analyze the income effect of the price-specie flow mechanism.
The income is also affected by the price-specie flow mechanism. In case a given company has a deficit it is trying to reduce, then that means that the consumption of goods will reduce .the reduction in the demand in commodities leads to the dropping of prices in the countries. The countries where they are likely to sell higher will consequently attract the products increasing the exports.
