Question : Which of the following is not a factor that affects the trade balance?
Option 1: Exchange rates
Option 2: Tariffs and trade barriers
Option 3: Domestic consumption
Option 4: foreign demand
Correct Answer: Domestic consumption
Solution :
The correct answer is (c) Domestic consumption.
The trade balance is determined by the difference between a country's exports and imports of goods and services. While domestic consumption can indirectly affect the trade balance by influencing the demand for imports, it is not a direct factor that affects the trade balance. The other options listed are all factors that can directly impact the trade balance:
a) Exchange rates: Fluctuations in exchange rates can affect the competitiveness of a country's exports and the cost of its imports, influencing the trade balance.
b) Tariffs and trade barriers: Imposing tariffs or trade barriers on imports can affect the volume and cost of imported goods, which in turn can impact the trade balance.
d) Foreign demand: The level of demand for a country's exports from foreign markets can directly impact its trade balance. Higher foreign demand for a country's goods and services can lead to a trade surplus, while lower demand can result in a trade deficit.
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