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April 2011 Q.18

J

jm_kinuthia

Member
In question 18 of April 2011, why is the answer B ?

I thought it can't be B because a exports are part of injections while imports are part of withdrawals so in that case, the balance would worsen due to more imports and less exports.

Please make me understand where am going wrong.
 
If injections are less than withdrawals, the level of aggregate demand will fall and national income will fall. As income falls, exports stay the same and imports increase, so the balance of trade (X-M) will improve.

Injections (J) include investment (I), government spending (G) and exports (X); and withdrawals (W) include savings (S), taxation (T) and imports (M). We assume that J are all autonomous, ie not dependent on income, whereas W depend on income.

Just because J<W doesn't mean that X<M, but even if X<M, the consequent fall in income would cause a fall in M so that X-M would improve (even if it was in deficit, it will now be a smaller deficit!).
 
Am sure you meant that "...As income falls, exports stay the same and imports decrease, so the balance of trade (X-M) will improve.



Thanks.
 
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