Thanks to visit codestin.com
Credit goes to www.scribd.com

Scribd
Upload
28 views2 pages

Chapter 46

The document discusses the interrelatedness of macroeconomic problems, focusing on the internal and external value of money, the balance of payments, inflation, and economic growth. It highlights how inflation can negatively impact a country's competitiveness and balance of payments, while also noting the potential conflicts between economic growth and environmental sustainability. The need for sustainable economic growth is emphasized as a key objective amidst these challenges.

Uploaded by

nilushasooriyaarachchi1005
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
28 views2 pages

Chapter 46

The document discusses the interrelatedness of macroeconomic problems, focusing on the internal and external value of money, the balance of payments, inflation, and economic growth. It highlights how inflation can negatively impact a country's competitiveness and balance of payments, while also noting the potential conflicts between economic growth and environmental sustainability. The need for sustainable economic growth is emphasized as a key objective amidst these challenges.

Uploaded by

nilushasooriyaarachchi1005
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

Chapter 46-Links between - macroeconomic problems and their interrelatedness

Relationship between internal and external value of money

The internal value of money is the value of money when buying goods and services. This is the
real value of money and it is measured by the purchasing power of money. The external value
of money is what the currency is worth, as measured in foreign currency. This is the exchange
rate.

If the internal value of a country’s money falls as a result of a rise in its inflation rate above that
of rival countries, demand for its products will fall. As a result, demand for the country’s
currency will fall as foreigners buy fewer of the country’s exports, while the supply of the
currency on the foreign exchange market will rise as more imports are purchased.

The relationship between the balance of payments and inflation

If the domestic economy enters a period of inflation that is high relative to its trading partners,
then problems are likely to follow for the balance of payments. If prices rise more rapidly in the
domestic economy than in the country’s trading partners, the result will be a loss in
international competitiveness, making it more difficult for firms to export their goods, and
leading to a rise in imports. This is likely to lead to a deficit on the current account of the
balance of payments.
An increase in a current account surplus may cause inflation as it will mean that net exports are
making an increasing contribution to aggregate demand and more money will be flowing into
the country than leaving it.

The relationship between growth and inflation

Achieving economic growth using the supply-side policies can lead to a rightward shift in the
long-run aggregate supply curve (LRAS). However, if the authorities try to encourage economic
growth by using demand-side policies, the result may be upward pressure on the price level,
which could lead to inflation if the policy continues in operation.

A high rate of inflation is likely to reduce a country’s economic growth rate. This is because net
exports are likely to fall.

Economic growth and the balance of payments

An increase in economic growth resulting in higher real incomes could lead to an increase in
imports of goods and services, if domestic residents spend a high proportion of their additional
income abroad.

Economic growth may be export-led. This means it is largely the result of an increase in net
exports. Higher net exports will cause a multiple increase in GDP.

Economic growth and sustainability of the environment

Perhaps one of the most apparent conflicts between macroeconomic problems is that between
economic growth and the environment. There is a potential danger that in pursuing economic growth,
strategies could be adopted that damage the environment. Sustainable economic growth should be the
objective

You might also like