ExpertMedium1 markMultiple Choice
AQA GCSE · Question 10 · How the economy works
Which of the following identifies the most likely effects of a significant fall in economic growth?
Effect on unemployment Effect on balance of trade deficit A Decrease Decrease B Decrease Increase C Increase Decrease D Increase Increase
Which of the following identifies the most likely effects of a significant fall in economic growth?
| Effect on unemployment | Effect on balance of trade deficit | |
|---|---|---|
| A | Decrease | Decrease |
| B | Decrease | Increase |
| C | Increase | Decrease |
| D | Increase | Increase |
Answer options:
A.
Decrease on unemployment, Decrease on balance of trade deficit
B.
Decrease on unemployment, Increase on balance of trade deficit
C.
Increase on unemployment, Decrease on balance of trade deficit
D.
Increase on unemployment, Increase on balance of trade deficit
How to approach this question
1. Consider the effect of a fall in economic growth on firms' demand for labour. This will determine the effect on unemployment. 2. Consider the effect of falling national income on the demand for imported goods. This will determine the effect on the trade deficit.
Full Answer
C.Increase on unemployment, Decrease on balance of trade deficit✓ Correct
The correct answer is C. A fall in economic growth (a recession) means firms produce less and lay off workers, increasing unemployment. With lower incomes, people and firms buy fewer imported goods, which reduces the trade deficit.
A significant fall in economic growth is a recession. During a recession, firms see a drop in demand for their products, so they cut back on production and lay off workers, causing cyclical unemployment to increase. As people's incomes fall and businesses invest less, the overall demand for goods and services, including imports, decreases. A fall in imports, assuming exports remain constant or fall by less, will lead to a reduction in the trade deficit (or an increase in a surplus).
Common mistakes
Thinking that a fall in economic growth worsens all economic indicators. While it worsens unemployment, it can paradoxically improve the trade balance.
Practice the full AQA GCSE Economics Paper 2
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