Circular Flow Model
Which sector represents exports and imports in the circular flow model?
The overseas sector.
What are the two main accounts of the balance of payments?
The current account and the capital and financial account.
What is the balance of trade?
The difference between exports and imports of goods.
What is absolute advantage?
The ability to produce more of a good using fewer resources.
What is an exchange rate?
The price of one currency in terms of another.
Identify one injection and one leakage related to international trade.
Injection: exports; Leakage: imports.
In which account are exports and imports of goods recorded?
The current account.
What does a trade surplus indicate?
Exports exceed imports.
What is comparative advantage?
The ability to produce a good at a lower opportunity cost.
What happens to exports when the domestic currency appreciates?
Exports become more expensive for overseas buyers.
Explain how exports affect national income.
Exports increase aggregate demand, leading to higher production, income, and employment.
Explain why the balance of payments must always balance.
Because deficits in one account are offset by surpluses in another through financial flows.
Explain how commodity prices affect the balance of trade.
Higher export prices increase export revenue, improving the trade balance.
Explain why countries specialise according to comparative advantage, not absolute advantage.
Comparative advantage allows total global output to increase even if one country is more efficient in all goods.
Explain how exchange rate movements affect import prices.
Appreciation lowers import prices; depreciation raises them.
Analyse the impact of rising imports on domestic firms using the circular flow model.
Increased imports act as a leakage, reducing demand for domestic goods, lowering firm revenue and potentially employment.
Analyse how a current account deficit can be financed.
Through capital inflows such as foreign investment, loans, or portfolio investment.
Analyse the impact of a strong domestic currency on the balance of trade.
Exports become less competitive and imports cheaper, potentially worsening the trade balance.
Analyse how specialisation increases global economic efficiency.
Resources are allocated to their most productive uses, increasing output and consumption possibilities.
Analyse how a depreciation of the currency affects the balance of trade.
Exports become more competitive and imports more expensive, potentially improving the trade balance.
Evaluate how a persistent trade deficit may affect long-term economic growth through the circular flow model.
Ongoing leakages reduce domestic income unless offset by capital inflows, potentially increasing foreign debt and slowing growth.
Assess whether a persistent current account deficit is necessarily a problem for an economy.
Not always, it can fund productive investment, but becomes problematic if it leads to unsustainable foreign debt.
Evaluate how changes in global demand influence a country’s balance of trade.
Strong global demand boosts exports, while weak demand reduces export revenue and worsens the trade balance.
Evaluate the limitations of comparative advantage in the real world.
It assumes full employment, no transport costs, and static advantages, which rarely exist in reality.
Evaluate the impact of exchange rate volatility on international trade decisions.
It increases uncertainty, discourages trade and investment, and raises hedging costs.