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Price Level and International Trade
Price Level and International Trade
Rupesh Puri
Measuring a price level means creating a hypothetical basket of goods and services that
represents a set of consumer purchase and calculate how the total cost of buying basket of goods
increase over time. Inflation is the increase in the overall price level of all goods and services and
not individual goods. It is measured as the percentage change between price levels over time. In
order to measure the price level, economist compute a weighted average of the prices of the
items in the basket[ CITATION Gre201 \l 1033 ]. The weights are based on actual quantities of
The basket of goods and services includes of different items individual, business and
organizations buy. Price level represents the purchasing power of money or the inflation.
Economists use Consumer Price Index (CPI) which is a measure of the cost in period of basket
of goods and services relative to the cost of basket of goods. CPI = Value of basket in current
Substitution bias arise because if the price of apple is high but the price of oranges is low,
than consumers might shift consumption to oranges by which they can avoid experiencing the
price increase[ CITATION Aca16 \l 1033 ]. It does not takes into account the change in
The quality/ new good bias arise because it there would be rise in cost of living with the
improvements in the quality of existing goods and invention on new goods which are not taken
into account. Since, the basket of goods and services are fixed while measuring CPI substitution
and new good bias arise. For example- If apple charges iphone higher than previous year adding
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charger to it than to calculate inflation as per the previous year rate would impact because it is a
A high level of trade indicates more than 50% of its production or goods produced in nations is
exported to other countries. Trade imbalance is when countries run persistent surpluses on their
trade whereas other experience persistence and often large deficits. There are three factors that
Trade[ CITATION Kri141 \l 1033 ]. Level of trade is measured by the percentage of exports of
the GDP or the size of economy whereas trade balance is the different between export and the
import.
a- Large economy normally have lower level of international trade because more of the
trading is done within the country. It has a little less impact on international trade
balance. For example- US being the biggest economy has the trade deficit of $68.9
billion and it export only 14% of the GDP, which is lower level of trade in
b- There is an imbalance between domestic investment rate and domestic saving rate,
which includes government and private savings. It leads to trade imbalance but has
little to do with level of trade. If the domestic investment would be higher than people
would not be motivated to manufacture or produce new things in the country which
force the economy to import more than the exports[ CITATION Hai11 \l 1033 ].
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c- Many large trading partners geographically nearby would increase the levels of trade.
For example- Sweden has many trading partners across Europe and long history of
d- A large budget deficit means a country exporting less and importing more. This
economy has large demand for financial investment and is likely to have an inflow of
foreign capital.
e- The countries with strong tradition of discouraging trade affect or reduces the level of
trade. However, this does not have to do with the trade balance as it is determined by
Numerical- Part C
= (225+66) – (192+77)
= 291- 269
= £ 22 billion
It means UK has £22 billion trade deficit in the year 2001. Trade deficit means the value of
= (X-M) + NY + NCT
= - 24.
The current account balance for 2001 is –£ 24 billion. The trade balance is also negative and Net
transfer payment is also negative which shows Uk imported more goods than exported and sends
c- The payment on foregin investment and government transfer were counted on the
positive side of current account balance for the United Kingdom in 2001 because the
services received by UK was from these payments made. UK has imported more amount
as income from foreign investment. Government transfer are those amount country
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donate through different NGOs and IGOs to end the hunger, poverty or to help some
Conclusion
democracy or over the period, now it cost 150-200 rupees. This is inflation, over the period of
time the price of the commodity increases. It is measured through the CPI (Consumer Price
Index) which has a fixed set of basket of goods and services. Level of trade is the percentage of
exports from the GDP or the economy size. Small economy having trading partners near to them
and history of international trade tend to having higher level of trade. Large economy with less
trading parties nearby and limited history of international trade relatively have lower levels of
trade. Balance of trade is the difference between value of country’s exports and value of its
imports.
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References
Academy, K. (2016). How changes in the cost of living are measured. Khan Academy.
doi:https://www.khanacademy.org/economics-finance-domain/macroeconomics/macro-
economic-indicators-and-the-business-cycle/macro-price-indices-and-inflation/a/how-
changes-in-the-cost-of-living-are-measured-cnx
Bildirici, M. &. (2012). Global Imbalances in Current Account Balances. Journal of Applied
Hailu, Z. A. (2011). The Impact of Foreign Aid on Trade Imbalances of Sub-Saharan Africa.
Krings, G. M.-C. (2014). Trade integration and trade imbalances in the european union: A
doi:http://dx.doi.org/10.1371/journal.pone.0083448
Stax, O. (2018). The Difference between Level of Trade and the Trade Balance. Rice University,
23.1-23.9.
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