QUESTION 78 (5 marks)
A new domestic processing facility initially requires $2 billion of imported machinery. Once operational, it is forecast to substitute for $300 million of imports annually and generate $200 million of additional annual exports. Evaluate its external-stability effect across the two stages.
Practice marking scheme
Answer
Initial import demand may weaken the trade balance; later operation may improve it by $500 million annually, other flows unchanged.
Working
Construction-related machinery imports raise M initially. Later, avoided imports and new exports improve X − M by 300 + 200 = $500 million per year on the supplied forecasts. Competitiveness, operating imports, exchange rates and foreign income payments can alter the result. A simple trade-flow improvement is not a complete balance-of-payments or debt assessment.
Marking criteria
- Explains the initial import effect. [2 marks]
- Calculates the forecast $500 million annual improvement. [1 mark]
- Evaluates forecasts and distinguishes trade flows from complete external stability. [2 marks]
Practice question aligned to the current QCAA syllabus; review the worked solution and marking criteria.
View the QCAA syllabusCompare your working with the guide above.