AQA A-level Economics new 7136 - 06, 13 & 19 Jun 2017 [Exam Discussion]

An increase in exports means increasing the total value of export sales, leading to an increase in the balance of payments surplus or decrease in the balance of payments deficit. This is further strengthened by the decrease in exports which has the same effect. This helps to achieve one of the UK's main policy objectives - attaining a satisfactory balance of payments, avoiding an external deficit as this could create an exchange rate crisis.

Firstly, imports and exports are both part of net trade or net exports which is a component of AD. As exports increase and imports decrease, the net exports (exports-imports) increase in value, shifting the aggregate demand curve to the right. This can affect the economy in many ways as increasing aggregate demand leads to an increase in real national output and therefore leads to economic growth as more output is being produced. This can also be expressed using the circular flow of income: imports are leakages or withdrawals which reduce the amount of national income in the circular flow, whereas exports are injections which increase the amount of income in the circular flow. As the exports increase and imports decrease, the overall injections are greater than the leakages and the equilibrium level of national income rises, leading to economic growth.

However, the extent to which economic gowth occurs or real national income increases by as a result of the increase in aggregate demand depends on the national income multiplier. If the mutliplier is >1, then real national income is more elastic or sensitive to changes in aggregate demand - it will increase more proportionately than the initial increase in aggregate demand. However, if it is less than 1 or inelastic - it will lead to a lower proportion of increase in national income. Either way, economic growth still occurs - but the multiplier determines whether its a large growth or a small growth.

Going hand in hand with this concept is employment, another macroeconomic objective. Increases in exports could mean boosting employment because it is indicative of higher domestic demand - labour is derived demand. This means more people will be unemployed - decreasing the natural rate of unemployment such as those who are structurally unemployed (finding new jobs etc). or cylically unemployed due to the lack of demand in the economy. This overall leads to economic growth as more employment means more incomes rising leading to more consumption by individuals and investment by firms as business confidence (animal spirits) grow - leading to AD shifting to the right - and economic growth occurring. This is an example of Germany's competitiveness: German exports are competitive, Germany is selling a lot of exports and this is leading to higher domestic employment in the exporting sector. Without the strong export demand, the German economy would be weaker and we would be liable to have higher unemployment. On the other hand, a reduction in imports could indicate the complete opposite too - in a recession, maybe the economy is busting and consumer spending lowers leading to a reduction in imported goods demanded - showing a weak economy suffering. This may lead to a surplus but can be an example of a case of a recession and high unemployment - bad for the economy.

Talking about the mutliplier earlier, an important concept of marginal propensity to consume comes handy. If exports are increase, the marginal propensity to consume must be high and domestically produced goods are being demanded more. This also leads to more consumption, increase in AD, ceterius paribus and therefore economic growth.

Assuming increase in exports and reduction in imports go hand in hand with the exchange rates, the UK's change rate must be low or possibly devalued - making exports cheaper and increasing their sales, and making imports more expensive - decreasing their sales. This shows increases in the UK's international competitiveness - maybe through productivity levels increasing - which leads to long-term economic growth, shown by the LRAS shifting to the right.

So, the macroeconomic performance of an increase in exports and decrease in imports really depends on the reason as to why those factors changed: if it is due to competitiveness increasing, it will lead to higher demand for exports and will boost domestic employment which is good for the economy. However, if it is due to a recession hitting domestic demand causing a fall in import spending, then not only will exports fall - but so will imports (fall even more), so domestic employment decreases and unemployemnt increases heavily. Also, all these shifts in AD causing real national output to increase also depends where the AD curve is intersecting or when the economy is operating on the AS curve - if it is at the start of the curve in the horizontal section where the curve is elastic and the increase in AD will lead to a large increase in real national income - because there is tons of spare capacity and the labour market is loose - the economy is operating under its full potential or productivity capacity and are in a negative output gap, so increases in demand can be backed up by an increase in the supply. However, if AD was closer to the end of the SRAS curve - the vertical section which is inelastic it will lead to only increases in price level and very small, if any, increases in real national output. This is because the labour market is now tight and the economy is producing at its full productive capacity and cannot increase supply any more - this leads to intense demand-pull inflation or unsustainable economic growth. So, economic growth always occurs but with consequences and in this case, the extent to which it occurs depends on where the economy is operating on the SRAS or LRAS curve. In addition, you can differentiate between the type of economic growth that occurs - if the economy was in a negative output gap, any increases in AD will lead to short-term economic growth or economic recovery, usually happens after a recession.

In essence, it's all about export-led growth in this context where in the short run, economic growth occurs due to increases in exports and in the long-run, this may lead to long-run economic growth resulting from the overall increase in international competitiveness of exporting industries. In addition, demand-pull inflation could lead to increases in the price level and could make the economy less competitive again, so may reduce the surplus in the future or increase the deficit - so the economic growth may not be sustained. Also, the multiplier plays an important role as if economic growth outpaces aggregate demand also - cyclical unemployment occurs again in other industries.

NOT SURE IF I CAN TALK ABOUT J-CURVE OR MARSHALL-LERNER CONDITION - to evaluate whether it leads to economic growth or not - depends on value of export increase and import decrease.

I know I've talked a bunch of rubbish in this essay, I could've wrote much more tbh but I cba. I wrote half of random stuff lol which might be off-topic to the question but I just wanted to pure concentrated economic juice out of my brain and release it all just to show I have the knowledge but may not know if it's relevant or not - which hopefully you will help me decide !!!

Also, why on a positive externality of consumption diagram is the optimal price above the free market price because surely if the price was higher then it would disincentivise consumers to buy the good that gives off the positive externality as it is more expensive. This is the same problem in a negative externality of consumption diagram where the optimal price is below the free market price

this is amazing!! But some of it you didn't need to include, I chose this one on purpose because I knew somewhere in my as folder I had written it just a few tips:
1) as a rule with questions to do with macroeconomic performance (well as my teacher always tells me) introduce by stating the four main macro objectives.
2) this is how I started -> To begin with, macroeconomic performance is relative to the four main macro obj, these are....
3) okay so your second paragraph and where you talk about demand pull inflation offsetting (8th paragraph if I'm right) you can combine those ideas. For example -> when exports rise more rapidly than exports, this may increase AD as the value of x > m. This can be shown in the diagram below. (Short run shift in AD) then explain the diagram. Then say the significant increase in gpl may result in increased inflationary pressures. This leads to a potential trade off between short run economic growth and price stability.
4) do you see it's just more a logical flow ?
5) the question is the about the UK so for the best way to achieve top marks, think about the current uk situation. Inflation at 2.3%, higher than the target for 2% If we are able to boost our international competitiveness will it help stable confidence and inwards investment and therefore put us in a better situation with Brexit etc Will we even see an export-led growth, given that low interest rates have done little to stimulate growth and investment?
6. I wouldn't mention the marshall lerner condition, just talking about the ped of x and m is a strong evaluation point. Also the 2nd to last paragraph
"Also, all these shifts in AD causing real national output to increase also depends where the AD curve is intersecting or when the ...." diagram all these ideas, (though I know its hard to do on tsr)

Finally relax I think you will do really well, I think if you just structure it more logically it will read much better!

Would an increase in productivity of labour e.g. through training lead to an increase in SRAS or LRAS. Everywhere online says it will shift LRAS out but it confuses me because SRAS is all about costs of production so surely increased productivity will lead to lower costs of production and therefore shift SRAS out rather than LRAS. Thanks for any answers

Sorry, I didn't write this as an proper essay lol - was just going to write brief points then went into fire mode and turned it into an essay randomly lol - no structure as that wasn't the intention .
Oh right, thanks - I'll bear that in mind next time! I don't start with them, but it's a great idea and I will do in the future!
Yes, thank you - I could've merged many points together but I was sleepy and I didn't want to. But, I definitely see your points with the logical flow - makes it easier for the examiner to understand. Thanks!
Yes, of course I'd diagram them !!!! Lol, I cba for it on TSR - in mock exams I draw them like 5 times lmao - overdo it XD..

Btw, can you explain this point please - Will we even see an export-led growth, given that low interest rates have done little to stimulate growth and investment?

Sorry tbh, as I said - I never really ever revise lol all I learn is from class and sometimes free periods. I've spent like 1 or 2 odd weeks at maximum throughout this year revising for econ at home. I'm actually very very lazy and that's why my teacher always tell me that I'm gifted and learn content quickly but I don't read around the subject etc - that's why I don't know much of UK's current situation etc.

Thanks a lot for the advice though - it was amazing , definitely the most important logical chain of reasoning part lol - I need to exploit that skill to get my A!

Lol my bad, you don't need to write it in proper essay format on tsr xD you can still score highly with your amount of knowledge you have (do keep revising you are really good! And I think you lack confidence ) And if I was you, literally a day before the exam check the latest figures for the UK economy; inflation, national debt, interest rates. Truthfully, the more you read up on the subject the more it helps you be critical and evaluate more, if you are gonna continue with economics it's more important then but if not just keep up to date with figures.

Okay, well essentially since the financial crisis the UK central bank wanted to boost growth as a key priority, what's a way to do this cut interest rates, decreases the cost of borrowing, andin theory stimulates investment. What has actually happened, it was a good short run measure but now as interest rates continue to be cut, we are not seeing positive multiplier effects. It's just simply not enough. Lower interest rates are likely to come hand in hand with a depreciating currency but if lower interest rates haven't been enough to stimulate investment and growth such as export-led, perhaps it indicates that the UK even if the UK tries to increase export-led growth the low level of investment is hard to offset.

Tbh just ignore that point I think I had an idea why it would be useful but my mind has gone blank xD

Lower costs of productions indicate higher levels of productivity.


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That's what I said..I think you meant higher levels of productivity indicate lower costs of production.

If so, they do 'indicate' for sure, but the poster said 'lead to'.

Would an increase in productivity of labour e.g. through training lead to an increase in SRAS or LRAS. Everywhere online says it will shift LRAS out but it confuses me because SRAS is all about costs of production so surely increased productivity will lead to lower costs of production and therefore shift SRAS out rather than LRAS. Thanks for any answers

how are you guys preparing for MCQ? (paper 3 not AS :P)

Use ones from other exams boards- OCR and PRE U in particular - they are a lot harder which makes for good practice

Use ones from other exams boards- OCR and PRE U in particular - they are a lot harder which makes for good practice

What diagrams should I revise for macro?
Also, how are you guys revising? Are you using old spec papers?

Evaluate the view that firms will try to minimise their costs and maximise their revenue ? Help, is this profit maxi and reven maxim

Also evaluate the view that a decrease in government spending is always unnecessary?
my ideas: decrease in ad->>> neg multiplier effects ->> u/e
Any ideas