Download AS Macro: Assess the extent to which a rise in imports may

AS Macro: Assess the extent to which a rise in imports may affect macroeconomic performance (25 marks)
Like many macro questions, the focus is on the longer-term performance of the economy – this requires a brief
explanation at the start of the answer – e.g. economic growth, unemployment, inflation and material well-being.
First - build an analysis of how rising demand for imports might be detrimental to the economy
1. Loss of aggregate demand (C+I+G+X-M) as imports are a withdrawal from the circular flow
2. Use an AD-AS diagram to show this and possible employment effects (falling demand for labour)
3. If imports are taking up a growing share of total demand (known as import penetration) this can threaten
domestic jobs and lower domestic output and profits – give a couple of examples of declining industries.
There is a chart showing import penetration on the next page. This may cause some structural
unemployment in the economy.
4. Possible negative multiplier effects and fall-off in investment spending in industries affected
5. Increase in the size of the trade deficit on the balance of payments
6. Slower GDP growth and possible loss of jobs might hit government tax revenues
Evaluate the question – consider alternative viewpoints – build arguments that spending on imports has benefits
1. An economy might be importing capital equipment and new technology which might have a positive
effect on the supply-side of the economy in future years
a. Higher productivity and lower unit costs
b. Increased capacity to produce (outward shift of PPF / LRAS) – and capacity to export
2. It is economically efficient to demand more imports of the products that other countries can supply more
cheaply – leading to gains in allocative efficiency. This is based on the law of comparative advantage
3. Increased imports create competition for domestic businesses – stimulating improvements in dynamic
efficiency and reducing monopoly power / lowering prices for consumers
4. Imports of cheaper products can help to keep inflation under control
5. Rising demand for imports provide a short term boost to consumers’ standard of living
6. Providing that the economy can achieve a higher value of exports, the rising demand for imports need not
necessarily cause a much bigger trade deficit
7. Evaluation comments might ask
a. “Why is demand for imports rising”
i. Might be that the economy is in a boom – demand will level off once a slowdown occurs
ii. Rising import demand could be due to an appreciating exchange rate
b. In a strong-growing economy, businesses must import components and raw materials to supply
their own products
Examiners will always credit use of up to date evidence e.g. on the performance of the British economy in recent
years. Don’t automatically assume that a trade deficit is bad and a trade surplus is good! Make good use of one
(perhaps two) AD-AS diagrams, come to a final evaluative conclusion, and your job is done.