Question

Question 1 Evaluate the following statement (you may use a diagram):
\Economic growth in a large country may worsen its terms of trade so much that its
welfare would be deteriorating after the growth."

Answer 1

Economic growth & Welfare
Economic growth may refer to the growth in the total production and consumption of goods and services in the economy. The policies adopted for the growth of economy may not always help the nation to develop the level of welfare along with the trade. The growth of economy can be biased affecting or helping only a group of the population to increase their standard of living. The growth may helps the economy to increase the level of employment, tackle the problems of poverty, attaining stability of the economy, the chances of the growth to create a wide gap in income is high in large countries. China, India etc. could be taken as examples. After the economic reforms of both the countries which helped them to increase the level of production and consumption, the income disparity created between the rural and urban also rise. Literally, poor becomes poorer and rich become richer. The terms of trade policies helped the entrepreneurs to expand their business and grow, the rural was not that occupied to achieve the level of growth.
Economic growth could also worsen the terms of trade by an increased level of imports to the exports made. Economic growth through open economy could affect the nation pushing the same to worse terms of trade. That further increases the risk of less welfare.

As the diagram implies, as economic growth rises, the welfare may decreases due to various reasons including large income inequality, gap in the ability of purchasing power etc. The terms of trade may be affected by the ability of a group of consumers to consume imported goods as the growth has raised the standard of living of a group of people.