IGCSE ECONOMICS 0455 Unit 6

International Trade and Globalisation

6.1 International Specialisation

6.1.1 Specialisation at an International Level

BASIS FOR SPECIALISATION
● Globalisation has increased the possibilities for specialisation: opened up int’l trade
● Countries specialise in the production of goods and services that make best use of the FoPs
that are most abundant in the country
● Best allocation of resources to produce maximum output
● More resources = cheaper to access/collect these resources, cheaper production
● Focus on one sector: improve efficiency, productivity
● International trade allows countries to trade its surplus products
● Specialised products gain an international reputation: strong brand loyalty

ADVANTAGES OF SPECIALISATION
● Higher levels of output: max efficiency, economies of scale so avg cost is low, world output
increases
● Increased employment and incomes: increased output, increased business opportunities,
creation of more jobs
● Economic growth and improved living standards: increased output means that revenues will
increase, especially as productivity/quality rises. Creation of jobs, revenue and better
products = higher living standards
● Opportunities for increased international trade: larger market base, can obtain the best and
cheapest products internationally
○ Enjoy economies of scale: expand internationally
○ Wider variety of products
○ Competitiveness increases bc of international firms

DISADVANTAGES OF SPECIALISATION
● Structural unemployment may occur
○ Short run: as a country moves into specialisation and allocates more and more
resources to a smaller number of specific industries, this will cause unemployment in
currently functional industries.
○ Short run: many workers may not have the training/knowledge to focus on the
specialised jobs, causing them to become unemployed in the short run
● Over-specialisation
○ Long run: being too dependent on a single industry could seriously harm the
economy if that industry were to fall out of demand (i.e. oil crisis in the Gulf)
● Limited consumer choice
 ○ Country specialises in a narrow range of products: not enough variety (esp without
int’l trade)
● Over-exploitation of resources
○ Limited resources: if they are used up the country could face economic collapse
● Over-reliance on international trade
○ Weather or transportation problems could be seriously harmful: no access to
necessary goods/services
○ Forced to uphold relations with countries: i.e. China US trade war

6.2 Globalisation, Free Trade and Protection

6.2.1 Definition of Globalisation

● Used to describe economic, social, technological, cultural and political changes that are
increasing interactions and interdependencies between people, firms and entire economies
all across the globe
● The global population is increasing, expanding the potential consumers in many countries
● The global economy expands as industrial output, employment, incomes and consumer
spending continue to rise in many economies
● Improvements in the speed of international communications and transport and the lowering
of costs make it easier and cheaper to discuss business, transport goods and to travel all over
the world
● It is becoming easier for workers to move from one country to another for employment,
especially within MNCs
● Economies are becoming more open - exchanging more goods, services, technologies, ideas
and capital internationally
○ Open economy: a national economy that engages in trade with other economies
● The pace of these changes has increased drastically because of:
○ Increasing wealth
○ Development of new tech
○ faster/cheaper communications
○ The development of the Internet
○ Transition of many planned economies to free market economies

6.2.2 Role of Multinational Companies (MNCs)

DEFINITION
● a firm that operates in two or more countries
● Premises and productive operations are located in more than one country
● Owns a number of subsidiary companies located in other countries that produces goods and
services in those countries

ADVANTAGES
● Large scale operation: economies of scale
○ Large market base: large demand, strong brand loyalty/reputation
○ Usually sell standardised, mass-produced goods and services
 ○ Can pass on cost savings to customers as lower prices → higher competitiveness
● Creation of jobs
○ Massive scale of production: requires a lot of jobs
○ Stable employment: unlikely to go bankrupt or out of business, constant flow of
income
● High profit: sell to a larger customer base
● Risk aversion
○ Operate in many markets
○ If one country suffers economically, the other countries will still be okay
○ Spread risks
● Avoid trade restrictions/tariffs/taxes
○ Different counties have different tax laws
○ MNCs set up in countries with relaxed trade restrictions
○ MNCs can also set up in countries with low corporate tax rates
● Transport costs saved
○ Can set up factories in many countries
○ Therefore products are created in the country and distributed within the country:
less transport costs

DISADVANTAGES
● Different legal systems, tax regulations, and environmental/quality control guidelines in each
country: lack of local knowledge can make management difficult
● Massive size and geographic spread: harder to control, harder to ensure that all branches
operate to the same standard, language barriers in communication
● Fluctuating exchange rates: difficult to measure/compare the value of an MNC’s sales and
profits in overseas markets
● MNCs often are exploitative, cost-cutting spills over to the workers below → poor working
conditions, low wages
● Influence on gov: often generate a lot of revenue and create a lot of jobs, have powerful
negotiating positions with governments
● Harms domestic economy: highly competitive prices, hard to compete with MNCs especially
for newer, smaller local firms
● Over-reliance on MNCs: can cause structural unemployment if they shut down operations in
countries
● Goods and services do not tailor to local tastes/customs → unsuccessful

6.2.3 The Benefits of Free Trade

DEFINITIONS
● International trade: the exchange of goods and services beyond national borders
○ entails the sale of exports (goods and services sold to overseas buyers) and imports
(foreign goods and services bought by domestic households and firms)
● Free trade: international trade can take place without any forms of protection (barriers to
trade), such as quantitative limits or taxes being imposed on exports

ADVANTAGES:
 ● Access to resources - enables firms and consumers to gain access to goods and services that
they cannot produce themselves
● Lower prices - reduces the costs of trading, whereas protectionism increases the costs of
trading. For example, it is cheaper for Germans to purchase foreign produced smartphones
made in China and Taiwan because of the high labour costs in Germany
○ By contrast, the imposition of trade barriers would mean that both domestic firms
and consumers have to pay more for imported goods and services
● Economies of scale - larger scale operations in global markets → cost savings can be passed
on to consumers in the form of lower prices and/or kept by the firms in the form of higher
profits
● Greater choice - access a larger variety of goods and services from different producers
around the world
● Increased market size - enables firms to earn more revenues and profits by having access to a
larger market
● Efficiency gains - forces domestic firms to focus on improving the quality of their output due
to foreign competition
○ By contrast, protectionist measures give domestic firms a false sense of security,
which can make them inefficient
● Improved international relations - The absence of trade barriers encourages international
trade and cooperation between countries
○ By contrast, if a country uses international trade barriers, other nations are likely to
retaliate by doing the same.

DISADVANTAGES:
● Int’l trade harms domestic economy
○ threatens many established businesses in developed countries as well as new, small
businesses trying to grow in less developed countries
○ Established businesses may lose market share/be forced out of business if they
cannot compete with larger overseas firms, or firms in low cost countries
○ Small businesses in less developed economies may also be unable to grow if
consumers in their countries can buy imported goods at much cheaper prices than
locally made goods
● contributes to rapid resource depletion and climate change
○ international trade has increased access to a greater number and variety of goods
we can consume
○ Higher demand = faster resource depletion
○ Increasing travel and the increased transportation by road, rail, ship or air is
increasing pollution
● may increase exploitation of workers and the environment
○ The free movement of capital has made it easy for MNCs to shift their production to
countries where wages, land prices and taxes on profits are lower
○ This increases structural unemployment in many developed countries
○ It also leads to exploitation of workers in less developed countries where health and
safety laws may be more relaxed or easy to ignore
 ○ it has also led to environmental damage in less developed countries where
environmental laws may be weak or their governments choose not to enforce them
● Increases international wealth gap
○ MNC’s and consumers from developed and rapidly developing countries dominate
the global demand for many natural resources, including foodstuffs, timber, zinc,
copper and other ores
○ MNCs use their purchasing power to force down prices
○ This has reduced revenues for producers of natural resources in less-developed
countries
○ Less developed countries tend to specialise in the extraction of minerals and the
production of foodstuffs
○ Cost-cutting means less wages for the FoPs

6.2.4 Methods of Protection

● Tariffs: a tax on imports. increases the costs of production to importers→ raises the price of
foreign goods in the domestic market and lowers the amount of products imported
○ Domestic producers will benefit as they will be able to produce more at a higher
price, as the quantity of imports falls, they take up the slack
○ The government benefits because they will earn tax revenue which can then be
spent on projects to improve education, health, infrastructure etc
○ employment will improve as firms employ more labour to increase their output.
○ Individuals will face higher prices. Firms will face higher costs of production if the
good is an input into their production process

● Quotas: a legal limit to the quantity of a good that can be imported over a particular time
period (typically a year)
○ limits the quantity imported and thus raises the market price of foreign goods
○ Does not create revenue for gov, unlike tariffs
● Subsidies: provide subsidies (lump-sum payments or per unit payments to domestic
producers) to help local firms compete with foreign imports
○ ower the costs of production for home firms, thereby helping to protect local jobs
○ Producers’ revenues rise → increased profit
○ Possible increase in exports
○ Lower prices for consumers
○ Gov has to spend on subsidies → less for other welfare

● Embargo: a ban on trade with a certain country, often due to a trade dispute or military
conflict
○ rarely benefits local consumers, who suffer from a lack of choice and higher prices
(due to the lack of supply)
○ More about the moral implications of it, as well as not wanting to enable or
encourage the country’s practices
● Administrative barriers: use bureaucratic rules and regulations as a form of protection
 ○ i.e. strict rules regarding food safety, environmental standards and product quality
○ Complying with these rules and regulations consumes a lot of time, and increases
the costs of production for overseas firms

6.2.5 Reasons for Protection

INFANT INDUSTRY
● Infant industry: new, unestablished businesses
● Protect infant industry from foreign competition, allows them to develop without being
overshadowed
● In the long run, these new businesses have the potential to provide many more jobs → need
a chance to develop
● Allows them to take advantage of economies of scale, become internationally competitive

SUNSET INDUSTRY/DECLINING INDUSTRY

● Many people are still employed in an industry, even if it is declining
● The closure of firms in these industries could result in high regional employment
● Example: many manufacturing industries in developed countries are declining bc of
competition from new international economies
● Trade barriers used to protect declining industries and protect domestic jobs, giving
employees time to relocate (or allowing them to stay)

STRATEGIC INDUSTRY
● Many governments want to protect their agricultural, energy and defense industries so they
are not entirely dependent on overseas supplies
● if a war were to break out then protectionist measures give the country the ability and
capacity to produce all the goods and services that it needs, rather than having to rely on
foreign countries
● Protect country from food shortages

DUMPING
● Dumping is a type of predatory pricing and unfair competition
○ Involves one country ‘flooding’ another with a product at a price significantly below
its global market price to increase sales and force domestic producers out of
business
○ After this happens, overseas firms can ‘capture’ the market and raise prices
○ This is usually only possible if exporting firms receive generous subsidies from their
own government
● International markets would raise tariffs so that these firms cannot afford to dump products

LIMIT OVER-SPECIALISATION
● Free trade encourages countries to specialise in the goods in which they have a comparative
advantage
● However, narrow range of products puts a country at high economic risk if demand for those
products fall
 ● Trade barriers allow a country to maintain a wider range of industries that would have
otherwise been threatened by overseas competition
● This prevents over-specialisation

CORRECT TRADE IMBALANCE

● Too much spending on imports → has to be cut
● Tariffs reduce this

OTHER COUNTRIES’ BARRIERS

● If other countries use tariffs, a country will be unlikely to remove theirs
● This is bc they do not want to be the ones exploited, while their own domestic firms cannot
reap the same benefits elsewhere

6.2.6 Consequences of Protection

● Restrict consumer choice: fewer goods and services for consumers, fewer resources for
producers to purchase
● Restrict new revenue/employment opportunities: firms cannot seek out new markets and
expand their production/increase demand for labour → domestic firms that need int’l supply
of products will suffer from tariffs
● Protect inefficient domestic firms: less pressure to improve productivity, therefore creates a
false sense of security → product quality will suffer, production costs/consumer prices will
be higher (no need to be competitive)
● Other countries may retaliate: one country’s raising tariffs may cause other countries to do
the same. i.e. China and the US

6.3 Foreign Exchange Rates

6.3.1 Definition of Foreign Exchange Rate

Foreign Exchange Rate: The price of one currency given in terms of another.
Foreign Exchange Rate Index: The price of one currency in terms of a basket of other currencies,
weighted according to their importance in the country’s international transactions.
Fixed Exchange Rate: An exchange rate whose value is set at a particular level in terms of another
currency or currencies. Also known as a ‘peg’.
Floating Exchange Rate: An exchange rate whose value is determined by market forces. There is no
government intervention in the foreign exchange market to influence the value of the exchange
rate. Also known as a ‘flexible exchange rate’.

6.3.2 Determination of Foreign Exchange Rate in Foreign Exchange Market

Currency is a commodity thus the value of a currency is totally dependent on demand and supply of
that currency in the foreign exchange market.
Appreciation: a rise in the value of a floating exchange rate.
Depreciation: a fall in the value of a floating exchange rate.
DEMAND AND SUPPLY FOR A FOREIGN CURRENCY
● firms, households, and investors purchase foreign goods, services and assets or sell goods,
services and assets to foreigners
● they demand (or supply) foreign currencies in order to complete their transactions
● i.e. people purchasing foreign goods need foreign currency to pay for it

● If demand shifts outwards, the value of the pound to the dollar increases
● If supply shifts inwards, the value of the pound to the dollar increases

6.3.3 Causes of Foreign Exchange Rate Fluctuations

● Changes in the current account balance
○ Current account deficit (imports > exports): more currency is supplied to pay for
imports. Less currency is demanded to spend on exports. Market price of currency
depreciates
○ Current account surplus (exports > imports): less currency is supplied to pay for
imports. more currency is demanded to spend on exports. Market price of currency
appreciates
● Inflation
○ If inflation rate rises: the price of local goods and services rises faster than the prices
of overseas products
○ Demand for imports goes up, demand for exports goes down
○ More currency supplied to purchase imported goods, less currency demanded for
exports
○ Exchange rate depreciates
● Change in interest rates (relative to other countries)
○ High interest rates: more investment in the country’s banks or other financial
institutions. Demand for currency increases → exchange rate appreciates
○ Low interest rates: less investment, demand for currency decreases → exchange rate
depreciates
● Speculation
○ Foreign currency speculator: a person or a firm such as a bank that tries to make a
profit from the buying and selling of foreign currencies
 ○ If speculators believe that the value of the currency is likely to fall, they will sell their
holdings of that currency
■ This increases the supply of the currency and hence the exchange rate
depreciates
■ When the ER falls, the speculators will buy the US dollars back for lower
prices, making a profit from the difference between sale and purchase prices
● Entry or departure of MNCs

6.3.4 Consequences of Foreign Exchange Rate Fluctuations

APPRECIATION OF CURRENCY
● price of exports goes up, price of imports goes down
● More imports will be purchased: cheaper
● If PED<1 for exports, an exchange rate appreciation will improve a current account deficit
○ So as long as PED is inelastic, MORE exports will be purchased, so exports > imports
● If PED>1 for exports, an exchange rate appreciation will worsen the current account deficit
○ PED is elastic, so demand for exports will fall drastically. Exports < imports

DEPRECIATION OF CURRENCY
● Price of exports goes down, price of imports goes up
● Less imports will be purchased: expensive
● If PED<1 for exports, an exchange rate depreciation will worsen a current account deficit
○ As long as PED is inelastic, the same number of exports will be purchased at lower
price, so exports < imports (in terms of value)
● If PED>1 for exports, an exchange rate depreciation will improve a current account deficit
○ PED is elastic, so more exports will be purchased. Exports > imports

6.3.5 Floating and Fixed Exchange Rates

FIXED EXCHANGE RATE SYSTEM
● value is fixed against the value of another currency or currencies
● It is maintained by the government
● The value may be set at a precise value, US$1.00 = Peso 1.00, or within a given range or
band, US1.00 = HK$7.75 to 7.85.
● If market forces are pushing down the value of the currency the central bank (Monetary
Authority) will step in and seek to increase its value
○ either by buying the currency or raising the interest rate
○ The government has an ‘exchange fund’ to pay for this
● Devalue: a fall in the value of the fixed exchange rate (this is changed by the government)
● Revalue: an increase in the value (this is changed by the government)

PROS CONS

● Helps control inflation: if inflation is ● Central Bank has to intervene often

high, value of currency goes down ● Expensive to maintain
(depreciates) ● Lose monetary independence: interest
 ● encourages investment: firms can plan
ahead, there is a fair amount of
certainty for future prices of
exports/imports
● Provides stability for the economy: no
rapid appreciation/depreciation
○ A rapid depreciation would
increase the cost of imports
and raw materials
○ A rapid appreciation could
make an export firm
uncompetitive
rates cannot be set without considering
international rates, because interest
rates must align with the
supply/demand forces affecting ER
● Highly dependent on competence of
Central Bank
● Overvalued/Inaccurate: too little
demand for exports, domestic economy
stalls, harms economic growth, worsens
current account deficit

FLOATING EXCHANGE RATE SYSTEM

● value of a currency is determined by market forces
● Rise in demand, fall in supply = price of currency rises
● Appreciation: rise in value of freely floating exchange rate
● Depreciation: fall in value of freely floating exchange rate

PROS CONS

● No need for large reserves ● Highly volatile: rapid changes in prices

● Less reliance on Central Bank, less of exports/imports
pressure on government funds ● Uncertainty: harms consumer
● Allow for more flexibility/independence confidence
with monetary policy ● Lack of investment: cannot predict
○ No need to pursue deflationary future prices
policy to reduce a current ● Encourages speculation (rapidly
account deficit buying/selling currency to adjust for
○ Adjust for major changes in fluctuations)
economy i.e. oil crisis ● Less incentive to control inflation
● Automatically fixes balance of
payments disequilibrium
○ Deficit: less demand for
currency, exchange rate falls
○ Price of exports goes down,
increases demand
○ Price of imports goes up,
reduces demand
○ Deficit is reduced

6.4 Current Account of Balance of Payments

6.4.1 Structure
DEFINITIONS
Balance of Payments is a record of all economic transactions between residents of a country and the
rest of the world in a particular time period (usually ¼ of a year).
Credits: money flowing into the country
Debits: money flowing out of the country
Trade deficit: deficit in the current account. More imports than exports

COMPOSITION OF THE CURRENT ACCOUNT

1. Trade in Goods: Exports (X) and Imports (M) of physical goods (aka tangibles, visibles)
a. When revenue received for exports of goods exceeds revenue spent on imports of
goods there is a SURPLUS in Trade in Goods
b. Other way around = deficit
2. Trade in Services: Exports (X) and Imports (M) of invisibles or intangibles
a. i.e. banking, insurance, education, transportation
b. Revenue from exports > costs of imports = surplus
3. Primary Income: covers income earned by individuals and firms
a. Compensation for employees: wages/salaries earned by residents working overseas
minus that earned by foreigners in the home country
b. Investment income: covers profits, dividends, interest received by residents from
abroad minus similar earned by foreigners in the home country
c. i.e. profits of MNCs are sent back to home country
4. Secondary Income (aka. Current transfer): Transfers of money, goods or services which are
sent out of a country/come into a country (NOT IN RETURN FOR ANYTHING ELSE)
a. i.e. gifts, charitable donations, remittances, government aid
b. Credits minus debits = transfers of money into the country minus transfers of money
out of the country (WITHOUT QUID PRO QUO)

6.4.2 Causes of Current Account Deficit and Surplus

FACTORS THAT INFLUENCE THE VALUE OF IMPORTS AND EXPORTs
● Relative inflation rates
○ affect a country’s international competitiveness
○ Higher inflation = prices of exports is higher than prices of imports
● Exchange Rates
○ Low ER: low export prices and vice versa
● Productivity
○ Lower labour costs = cheaper products
○ Increased productivity allows for more exports, less imports
● Quality
○ Determines demand for exported/imported products
● Marketing
○ Effectiveness of advertising of both domestically produced and foreign produced
goods
○ Affects balance of trade
● Domestic GDP
○ Rise in incomes = increase in purchase of imports
○ Purchase more raw materials for domestic industries
 ○ Purchase more consumer goods
○ Rising incomes may encourage firms to supply domestic consumers rather than
exporting goods (more income → higher domestic demand)
● Foreign GDP
○ Rise in overseas incomes will cause overseas demand to rise
○ More export purchases
● Trade restrictions

CAUSES OF CURRENT ACCOUNT DEFICIT

● Overvalued exchange rate
○ imports are cheaper and exports are uncompetitively expensive
○ Exports < imports
● Economic growth
○ Increase in national income: more disposable income to consume goods
○ Domestic producers may be unable to meet domestic demand
○ Consumers are forced to import goods
○ Fast economic growth can lead to a significant increase in the quantity of imports
● Decline in competitiveness/export sector
○ Domestic economy does not have enough skills/access to raw materials/productivity
○ i.e. aging population, depletion of natural resources, natural disasters
○ Similarly: rise in competitiveness of foreign industries, i.e. China
● Higher inflation
○ Price of goods and services is higher, imports become more competitive
○ HOWEVER this inflation would lead to a depreciation in the currency, which would
offset this decline in trade competitiveness
● Recession in other countries
○ Main trading partners experience negative economic growth → they will buy less
exports
● Borrowing money
○ High rates of borrowing to invest in, for example, third world countries can cause
current account deficits

CAUSES OF CURRENT ACCOUNT SURPLUS

● Undervalued exchange rate: ridiculously competitive exports
● Low domestic demand: lower consumer spending and lower spending on imports
○ Hence domestic employment will suffer from a weak economy
○ May be a symbol of economic recession
● Improvement in competitiveness of exports
○ More productive
○ Better quality
○ Lower prices
○ More consumption of domestic goods rather than imports
● High incomes abroad (i.e. rise in foreign countries’ GDP): more overseas demand
● High workers’ remittances
6.4.3 Consequences of Current Account Deficit and Surplus
CONSEQUENCES OF A CURRENT ACCOUNT DEFICIT
● Less consumer spending → fall in GDP
○ Loss of money from the economy = less is available for residents to spend on
domestic goods and services
○ Less income received by domestic firms, so GDP falls
● Unemployment
○ A current account deficit is a sign that fewer firms in the economy are able to
produce goods and services for export/to compete at home with imported products
○ Domestic firms see a fall in demand for their products: cut back production, reduce
demand for labour → higher unemployment
● Fall in ER value
○ Supply of currency for import payments > demand for currency for export payments
○ Imports become more expensive for domestic consumers to buy
○ Imported inflation
○ If demand for imports is price inelastic → spending on imported products will rise at
the expense of spending on domestically produced goods and services
● Overseas borrowing
○ A country might need to borrow money overseas in order to pay for annual deficits
○ Total debt will rise
○ More income will have to be used each year to pay interest charges
○ Increases the amount of money flowing out of the economy
○ Over time: reduces the amount of money available to invest in new
production/spend on domestic production
● Possible long run improvement in production
○ Imports of capital goods can help an economy expand production in the long run
○ Imported goods may be better quality than domestic goods → improve living
standards

CONSEQUENCES OF A TRADE SURPLUS

● Rise in GDP
○ Exporting firms enjoy significant and rising overseas revenues from the sale of their
exports
○ High demand for domestic goods
● Rise in employment
○ Domestic firms have to employ more people in order to meet rising overseas
demand
○ Higher revenues gives them the capacity to do this
● Political and economic pressure on the government from other countries
○ Pressure to reduce its trade surplus to they can reduce their trade deficits
○ Includes rise in trade protectionist policies
○ Could harm current account surplus in the long run
● Rise in inflation
 ○ increase in income from exports may cause demand-push inflation when it is spent
in the domestic economy
● Rise in ER value
○ demand for national currency will exceed its supply
○ Value of ER rises and remains high
○ Internationally, price of exports rises, this could result in falling demand and job
losses
● Persistent trade surplus may be a symptom of rapid industrial expansion of the economy
and a gov policy of maintaining an artificially low ER (exports cheap and imports expensive)
○ Creates demand for domestic goods
○ Boosts output and employment

6.4.4 Policies to Achieve Balance of Payments Stability

● Supply-side policy will increase domestic production and exports which can correct a current
account deficit
● Expansionary fiscal policy, by reducing taxes and increasing government expenditure can
increase total demand for imports to fix current account surplus, vice versa
● Contractionary monetary policy can correct a current account deficit, vice versa

MEASURES TO CORRECT A CURRENT ACCOUNT DEFICIT

● Use policy measures designed to reduce imports and/or increase exports
● TRADE POLICIES
○ Directly imposing import restrictions (trade protectionism)
○ Subsidising exports
○ devalue the country’s foreign ER (or encourage a depreciation in it)
● REDUCE CONSUMER SPENDING
○ Increase income tax
○ Raise interest rates
○ Raise indirect tax rates
○ This reduces purchases of imports, and also encourages firms to export since there is
less demand domestically
● SUPPLY SIDE POLICY (LONG RUN)
○ education/training → higher productivity, lower average costs of production →
translates into lower prices, more competitive internationally
○ Raises international competitiveness in the long run
○ Less negative effects: for example, trade protectionism causes retaliation, lower ER
causes imported inflation (imports are more expensive), increase in income tax
causes higher unemployment

MEASURES TO CORRECT A CURRENT ACCOUNT SURPLUS

● Revalue a fixed ER or encourage an appreciation in the floating ER
● Expansionary fiscal policy: lower tax rates and increase govt spending → increases
purchasing power
● Expansionary monetary policy: reduce interest rates to increase purchasing power (this could
harm the ER tho)