Ee Depends on type of economy (Developed v Developing, Small v Large)

Worldwide recession: Decrease in world demand for goods (fall in incomes),

decrease in business confidence, migration

Goods:

Problems: Free flow of imports (withdrawal from the circular flow of income),
reduce AD even more

Solutions: Protectionist measures
Tariffs to reduce flow of imports (Small nation model), quotas to restrict imports,
export subsidies to improve export competitiveness
Welfare loss to society (Consumption and production losses). (Small nation
model)
Reduce dependence on the external sector, reduce vulnerability to imported
inflation [Harm]
Large nations: able to diversify their economy to reduce impact of import
price push inflation [Lesser harm]
Short-term solution, unsustainable. Retaliation from trading partners would
occur (world-wide recession, protectionism is a beggar-thy-neighbour policy,
which will worsen global incomes) [Harm]

More harm than good for flow of goods and services


Capital:

Huge capital outflow: decrease in business confidence (Subprime 08, structural
problems of the financial sector. Eurozone crisis 10, excessive sovereign debt)

Capital: Short-term, hot money flow.

Solutions: Capital control
Capital controls in the form of mandatory deposits (1 year time-period), or total
restriction of capital outflow (Msia 97)

Problems: reduce flow of capital into the country, worsen BOP for the country
(Financial account). Disrupts international transaction. Prone to corruption

Benefits: Reduce the volatility of the economies (Hot monies flowing out of
developing economies, owing to lowering of i.r. in the USA, causing a mini
depression).
Depending on system of checks and balances in the economy, corruption may or
may not be prevented.
International transaction may not be disrupted if the grounds for capital control
is justified by a unanimous consensus, and is only temporary to prevent crises
from happening.



Labour: