Question

Use the Market for Loanable Funds, Net Foreign Investment and the Market for Foreign Currency Exchange diagrams combined, to examine the impact of a removal of import tariff on each market. In your answer make sure that you fully explain the impact in each market and that you comment on the impact on each of the following variables:

1)private saving

2)public saving

3)national saving

4)investment

5)net foreign investment

6)exchange rate

7)net exports

Answer 1

When tariff is removed from the imported goods from foreign trade partners, This is likely to increase imports and so net exports decline. As a result, demand for net exports (domestic currency) decreases and so real exchange rate depreciates. Hence, in foreign exchange market, there is a currency depreciation but there is no change in net exports and currency depreciation increases net exports so that final change is zero.

Since net exports are unchanged, net capital outflows are unchanged and this implies net foreign investment is unchanged. In the market for loanable funds, there is no change because net capital outflow is unchanged and there is no explicit change in private saving or public saving. Hence, there is no change in private saving, public saving, national saving, investment, net foreign investment