Qualification > Commerce

economics help needed

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ahaseebmirza:
Firstly Define both:....PED is the measure of elasticity concept that is (%Change in Demand/%Change In price) *100
Terms Of trade is (Export Prices/Import Prices)*100 which will give and index figure for terms of trade..
Now coming on the question If The good is Price Elastic i.e Elasticity>1, then if the prices rise then the quantity demanded will fall by a greater amount so as the terms of trade improves due to rise in export prices the current account deficity will simultaniously worsen because the net revenue will fall....THE MARSHALL LERNER COndition....However if the good is inelastic, then the current account deficit will reduce or even enter into surplus the J-CURVE Effect....

These both Curves relate terms of trade and the Elasticities concpet... :)

icyblind:
Thanks, ill learn the marshall condition as well :)

Coco:
Hey can anyone let me know...How can a current account surplus be brought back to obtain a balance of payments?

holtadit:

--- Quote from: Coco on May 29, 2010, 05:15:37 pm ---Hey can anyone let me know...How can a current account surplus be brought back to obtain a balance of payments?

--- End quote ---

I take IGCSE economics, so this might be an elementary level response :

A surplus is caused by exports exceeding imports, right ? So I would think of ways to bring exports under control.

Lovee:

--- Quote from: ahaseebmirza on May 29, 2010, 01:59:42 am ---For your 2nd Question:
If the Exchange rate is not fixed, When import rised comparitively to exports, There will be disequlibirium in the balance of payments account and a deficit because imports are more than exports so automatically the exchange rate will fall to fill up this deficit but as this falls now it will be more expenisve to purchase the imports..Suppose exchange rate was $1=SR 3 and Saudia is importing more so exchange rate depriciates to $1=SR 3.5  SO now more riyals have to be paid to get the same imports so price of import rises which raises the cost of raw materials or finsihed goods imported and thus inflation rises...On the other hand if exchange rates were fixed, it would not depreciate and the imports would not get expensive..

--- End quote ---

I disagree. This only applies on one condition. "When import rised comparitively to exports", that would start off the chain of events.

If this doesnt happen, fixed exchange rate systems actually invites imported inflation:

Before:
RM 1 : USD 1

Since USD has inflation,

RM x : USD 2,

and since the rate is fixed at RM 1: USD 1, x = RM 2

Thus the good has become more expensive in Malaysia.

On the other hand, free e/r actually prevents imported inflation. Because of Gustav Castell's purchasing power parity theory, E/R goes down because of inflation in the USD. This appreciation of the RM thus lowers the price of imports automatically.

Hope this explained some stuff :D

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