Question

4. i) Does a negative trade balance necessarily mean a sign of a weak economy? Explain

ii) You read in the newspaper that 500,000 workers have lost their jobs in the last month in Zambia. Is this a cause for concern? Explain why it may or may not be?

Answer 1

4)i) A neagtive trade balance means that imports are more than exports which implies that an economy would have more currency flowing out. This is a common scenario for economies and it is not always a sign of weak economy. It could imply that in short run, the economy is running trade deficit and could lead to making it a stronger economy in future.

But when there is a substantial trade deficit ie it continues for a long period of time, there are chances that the economy is growing weaker or there are chances that unemployment is also increasing. However, a trade deficit or a trade surplus would not always determine whether an economy is good or bad, it depends on the way the government or the institutions work in an economy.

ii) When workers lose jobs in a country, it is a sign of distress. In Zambia, when 500,000 workers lose jobs in a single month, it implies that the leadership or the working environment is flawed in that economy. Huge unemployment without cover or less cover would mean that people would demand less goods and services, there would be less savings, less spendings and this would ultimately impact the agggregate demand in the economy.

This is a cause of concern for the economy. Unemployment could be cyclical, structural or frictional in nature, but the ones where they are merely due to poor implementation of laws or existence of lax policies, it could be more harmful for the economy.

This given unemployment could mean a reduction in productivity, an increase in crime rate as more people would be left without food and work and would also reduce the confidence of people in laws and government. Hence unemployment in such large numbers can not only have an economic impact, rather it could cause social changes as well.

(you can comment for doubts)