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Reduction in Current Account Surplus and its Effects on an Economy

Question

Discuss whether or not a reduction in a country’s trade protection will reduce its current account surplus. In assessing each answer, use the table opposite. Why it might:

Category:

International Trade and Exchange Rates

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Preview Answer

I. 🍃Introduction
- Brief explanation of the impact of trade restrictions on imports
- Thesis statement: While lower tariffs, removal of quotas, and removal of bans/embargoes may increase imports and import expenditure, there are several factors that may limit their effectiveness.

II. Lower tariffs
- Explanation of how lower tariffs reduce the price of imports
- Potential increase in imports and import expenditure
- Limitations:
- Foreign firms may not have the capacity to supply more products
- Demand for imports may be price inelastic

III. Removal of quotas
- Explanation of how removal of quotas may result in more imports being purchased
- Potential increase in imports and import expenditure
- Limitations:
- The quality of imports may have fallen
- Other countries may also reduce their trade restrictions

IV. Removal of bans/embargoes
- Explanation of how removal of a ban/embargo will permit imports of the product to enter the country
- Potential increase in imports and import expenditure
- Limitations:
- Foreign firms may not have the capacity to supply more products
- The exchange rate may fall, raising exports and reducing imports

V. Higher import expenditure
- Explanation of how higher import expenditure may reduce the gap between export revenue and import expenditure
- Potential benefits for the economy
- Limitations:
- Export revenue may rise to match the higher import expenditure

VI. 👉Conclusion
- Recap of the potential benefits and limitations of reducing trade restrictions on imports
- Final thoughts on the effectiveness of these measures in promoting imports and import expenditure.

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