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Analyse how a recession may reduce a country’s imports.

Quick Answer:

A recession is a decrease in GDP over 6 months or more. A recession may reduce a country's imports for several reasons.

➣Consumer spending will fall

A recession is likely to reduce incomes, increase unemployment and reduce confidence levels. Consumer spending is likely to fall, therefore spending on imports decreases. In a recession, interest rates are cut. Therefore exchange rate depreciates making exports cheaper and imports more expensive. This reduction in the exchange rate improves the current account.

➣During recessions, governments may impose trade restrictions that will reduce imports

When a country falls into recession, one of the first measures that it takes to protect its economy from further damage is to revise its protectionism policy. Protectionism is when a country places taxes and regulations on the importation of foreign products and services. This is done in order to “protect” domestic business from foreign competition. In one way, protectionism makes a lot of sense because it helps to keep unemployment at a stable level.

➣A recession may cause a depreciation of the currency making imports more expensive

During a deep recession, a currency is likely to fall because the country becomes a less attractive place to invest. For example, when the great recession started in 2008, the UK experienced a significant depreciation.

➣ As output is falling, firms are likely to buy less raw materials from abroad , they are likely to buy fewer capital goods from abroad .

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