Evaluate how governments can correct a current-account imbalance and weigh the costs and limitations of each policy response.
The Central African country Chad has a triangle-shaped population pyramid and a high level of poverty. It regularly has an overall deficit on the current account of its balance of payments. Chad usually has a surplus on its secondary income. However, its trade in goods, trade in services and primary income are all usually in deficit. Some economists suggest that the Chadian Government should impose import quotas to reduce its trade in goods deficit.
Discuss whether or not imposing import quotas will reduce a trade in goods deficit.
Discuss whether or not imposing import quotas will reduce a trade in goods deficit.
In assessing each answer, use the table opposite.
Why it might:
- restrict imports
- lower supply may drive up price
- consumers and firms may switch to domestic goods
- could reduce gap between import expenditure and export revenue.
- consumers and firms may switch to domestic substitutes
- could reduce gap between import expenditure and export revenue.
Why it might not:
- import quotas may be higher than demand
- depends on the breadth of goods affected - fewer goods, less effective
- may not be domestic substitutes
- may be retaliation which could reduce export revenue
- smuggling may occur
- reduction in import spending may appreciate currency value, reducing exports.
8
Level
3
4(d)
Level & \multicolumn{1}{|c|}{ Description } & Marks
1 &
There is a simple attempt at using
economic definitions and terminology.
Some reference may be made to
economic theory, with occasional
understanding.
1-2
0
A mark of zero should be awarded for no
creditable content.
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L1 and up to 2 marks for an understanding of import quotas.
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