Question

Be sure to address each point in the question and explain your argument carefully.

4. Is a large trade deficit good or bad for a country? What is the difference between the U.S. current account deficits of the 1980s and the 1990s?

6. What is the environmental Kuznets curve? “Whether globalization has a positive or a negative impact on the environment depends on whether the scale effects and structural effects are, on balance, positive or negative.” Please describe.

Answer 1

4. A large trade deficit is bad for a country because of multiple reasons which are stated below:

• Economic growth ceases as the country is more dependent on imports to meet the demands of the economy
• Jobs are lost. How? When a country imports more than it exports, we call this a trade deficit. When this happens in a large scale, the productivity of the domestic market becomes so low that our country is reliant on other nations for satisfying even the basic needs.

Mid 80s saw a shift from surplus to deficit in the US economy with a deficit of close to $140 Billion. This situation persisted into the 90s as well with 1998 marking a deficit of $233 Billion. And from that point till now, the US has always been on a trade deficit.

6.

The Environmental Kuznets Curve (EKC) is used to describe the relationship between economic growth and environmental quality. The curve shows us an U-shaped relationship between economic output per capita and various measures of environmental quality. Take a lot a typical Kuznets curve below.

With the rise in globalization, firms experience economies of scale like never before with employment at its peak. All these together contribute to the scale effects. When this happens it ought to affect the environment due to these increased production. If their aren't any structural effects in the economy to counter the causes of scale effects then the environment will further detoriate at the advent of globalization. Hence for globalization to have a positive impact overall, the scale effects and structural effects need to be balanced.

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