Question

Briefly discuss the causes and consequences of trade deficits as it applies to the Ghanian economy. b). How do specialization and trade add to a nation’s output? Briefly explain. c). Describe briefly how a flexible exchange rate regime differs from a fixed exchange rate?

Answer 1

Ghanian economy and economies like Ghana are considered small economies.A trade deficit occurs when value of imports are greater than value of exports. There can various causes causing such trade deficit, it can be as it is a small country and production is insuffecient or inefficient. Indeed foriegn investment and imports can also result in employement in that nation just like how it happens United states. As trade ties with China allows lot of opportunities for US economy and citizens employment but also larger people also think trade deficit might cause unemployment as imports causes production in country to reduce.The dire consequences for smaller nations is that when trade deficit occurs country might suffer when there is any shock to their economy as foriegn investors can back down anytime and also debt might increase and it can cause balance of payment crisis.

b) So, How does trade help smaller nations in these situations. A trade with specilization might allow more people to be employed in a particular industry for which the country is capable to produce cheaper than other nations in trade. This will alow this smaller nation to exports its good and reduce the trade deficit and also it gives the benefit for people as specialization would allow exports to increase and employment to increase. The demerit of this country being dependent on other countries for trade of other goods indeed will be there. As trade deficit reduce the value of net exports will be likely to increase and the total national GDP would increase.

As GDP= C+I+G+NX.

c) Before we knowing the difference we should know the concept of impossible trinity , it means it is impossible to have all three policies together, those are to have independent monetary policy and fixed exchange rate and free capital flow. If we fix exchange rate we can have either free capital flow or independent monetary policy. A fixed exchange rate though gives advantage for foreign investors who will like less uncertanity over exchange rate and can does invest more but a flexible exchange rate gives opportunity a nation for an independent monetary policy and free capital flow to boost investment and control inflation . So, it is evident that why most nations opt for a flexible exchange rate such that they can control their countries inflation and allow free capital flow,