What this lesson teaches
I can explain the causes of weak growth, unemployment, inflation or deflation and a large trade imbalance.
Syllabus 9570, 3.2.2(a). Macroeconomic Issues: Macroeconomic issues and their causes; Undesirable economic growth - persistently low or negative, unsustainable, non-inclusive due to factors such as changes in AD or AS, environmental degradation, inequitable income distribution; Unemployment - demand-deficient, structural, frictional due to factors such as lack of AD, technological changes, mismatch of skills, transition between jobs; Price instability - demand-pull inflation, cost-push inflation, deflation due to factors such as changes in AD, costs of production, productive capacity; Persistently large balance of trade deficit or surplus due to factors such as changes in global conditions, international competitiveness, exchange rates
Make a guess
Country A's trade surplus grows because exports boom. Country B's grows because imports collapse. Which surplus is more likely a sign of a weak economy?
- Neither, because a bigger surplus is good news in both cases.
- Country B's, since falling imports signal weak spending.
- Country A's, because booming exports cause inflation.
Show the answer
Country B's, since falling imports signal weak spending.
Imports fall when households and firms cut spending. A surplus that grows that way signals weakness, not strength.
A trade surplus can reflect strong exports, but a growing surplus can also signal weak domestic spending.
A trade surplus means exports are worth more than imports.
It can reflect competitive exporters and strong foreign demand, which supports jobs and income.
But a surplus can also grow because domestic spending is weak, so imports fall. That is a sign of a weaker economy.
Persistent large surpluses can also cause friction with trading partners, and may mean a country is consuming less than it could. Singapore runs large, persistent current account surpluses, partly due to high national saving.
- Good sign
- Strong, competitive exports.
- Warning sign
- Imports falling because spending is weak.
Worked example: A bigger surplus during a slowdown
Exports stay at 120, but imports fall from 100 to 80 as household incomes and business investment fall.
- The surplus grows from 20 to 40.
- It grew because imports fell, not because exports rose.
- Imports fell because people and firms are spending less.
- So the larger surplus reflects weaker living standards, not greater competitiveness.
Watch out for this
A growing trade surplus always means exporters are doing well.
A surplus can grow because imports fall in a slowdown. Check whether exports rose or imports fell.
Check your understanding
Singapore's current account surplus stays large year after year, partly because households and firms save so much. What cost can this bring?
- Unemployment rises, because exporters are losing sales abroad.
- Residents consume less today than the economy could afford.
- Inflation rises, because cheap imports flood the home market.
Show the answer
Residents consume less today than the economy could afford.
Right. A lasting surplus means income is saved or lent abroad rather than spent on goods and services at home now.