‘According to David Hume’s theory of automatic price adjustment, countries experiencing current account deficit see price levels decrease, making them more competitive and increasing exports. That makes the current account deficit disappear.’. Critically explore this statement and provide examples to confirm or disprove it 'in details with example'.

‘According to David Hume’s theory of automatic price adjustment, countries experiencing current account deficit see price levels decrease, making them more competitive and increasing exports. That makes the current account deficit disappear.’. Critically explore this statement and provide examples to confirm or disprove it 'in details with example'.

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter20: Exchange Rates And The Macroeconomy

Section: Chapter Questions

Problem 2TY

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According to David Hume’s theory of automatic price adjustment, countries experiencing current account deficits see price levels decrease, making them more competitive and increasing exports. That makes the current account deficit disappear.’. Critically explore this statement and provide examples to confirm or disprove it
‘According to David Hume’s theory of automatic price adjustment, countries experiencing current account deficit see price levels decrease, making them more competitive and increasing exports. That makes the current account deficit disappear.’. Critically explore this statement and provide examples to confirm or disprove it
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Given that a country has a large and possibly unsustainable current account deficit, explain how you can reduce it using each of the following approaches: Elasticity approach The absorption approach The monetary approach Suggest solutions to the limitations of each of the three approaches in a) above.
‘According to David Hume’s theory of automatic price adjustment, countries experiencing current account deficit see price levels decrease, making them more competitiveandincreasingexports. That makes the current account deficit disappear.’. Critically explore this statement and provide examplesto confirm or disprove it.
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The tenure of the previous government, from 2013 to 2018, witnessed a skyrocketing current account deficit as it increased from $2.5 billion in FY13 to $18.9 billion in FY18. The major driver was the trade deficit, which widened from $19.2 billion in 2012 to $35.6 billion in 2017, according to data extracted from the ITC’s Trademap.org. Imports increased from $43.8 billion in 2012 to $57.4 billion in 2017 and exports decreased from $24.6 billion in 2012 to $21.9 billion in 2017. Between July 2014 and June 2015, REER had increased by 8.83%. It increased by 5.54% in the prior fiscal year, FY14. In simpler terms, the rupee was kept above its equilibrium value between June 2013 and June 2018, making it cheaper to purchase goods from other countries. Furthermore, exporters lost their competitiveness against foreign competitors in the global market. Today, with the rupee closer to its equilibrium value, exports have increased. This has positively impacted the trade balance, alleviating…
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