Explain the potential impacts on the global economy of sustained trade imbalances (25 marks)

(1) Point: Less global trade

Example: US had a trade deficit of $460bn in 2017 meaning more imports than exports, leads to protectionism (such as 35% tariff on Chinese tyres in 2010).

Analysis: Reduces trade imbalance of america as imports would fall, but also reduces global trade.

Evaluation: Consider significance: The impact on the global economy is severe, as protectionism often leads to retalliation meaning more trade barriers and less trade.

(2) Point: Lower global economic growth as a result of increased uncertainty and increasing relative prices

Example: Countries in trade surplus (Germany) and trade deficit (UK) will see opposing changes to currency

Analysis: Greater demand for German goods, such as BMW cars. UK consumers will pay for these cars in euros meaning currency exchange on the FEM, decreasing the supply of euros therefore appreciating the euro whilst depreciating the pound. This means BMW cars become relatively more expensive, decreasing German exports and global trade and therefore global growth

Evaluation: Trade is not the only determinant of a currency's value, therefore values should not be affected significantly

(Add a third point about uneven rates of economic growth causing greater wealth inequality throughout the world. Evaluating with the fact that Exports and Imports make up 5% of AD.