Question

Explain the connection between these variables; real GDP growth, inflation rate, government budget balance, exchange rate, private investment and trade balance from year 2007-2016. in Tonga commentary with macro relationships

Answer 1

The rise in real GDP shows that the economy is in a stage of higher economic development and growth Consumer expenditure, investment level, government growth policies and foreign relations are the major components of real GDP. Thus increasing trend of these variables shows the economic status of the economy in current scenario. The inflation rate will be very moderate under this condition. The economy will introduce most applicable policies which meet the needs of the customers and producers. The maintenance of the inflation rate helps to maintain a long run economic growth in the nation. The balance budget of government will maintained by reducing the deficit in trade balance. Certain trade liberalisation policies were imposed to attain higher economic growth in Tonga.

The exchange rate will be very low at this situation. The lower interest rate will increase foreign investments and private investment in the domestic economy. This lower exchange rate increases the level of export by protecting the existing domestic firms. The low level of interest rate in the economy increases the level of investment and increase the level of production. Thus Tonga will maintain the trade balance in an effective manner to avoid the occurrence of huge deficits. Government intervention will be in minimum level and this will improve the role and functioning of private enterprises. Thus the private investment increased and helps towards the betterment of the economy as a whole.