Eco401 GDB Solution

“Suppose a growing world with positive real income and economic growth. There are some lower income countries producing goods for basic necessities of life. If income of the poor people belonging to lower income countries increases, they move towards the luxurious goods like cars and air conditioners etc. Since, income elasticity of luxurious goods is positive i.e. as income increases; demand also increases. So, with the increase in income, demand of luxurious goods from abroad will increase because such types of goods are not produced domestically in lower income countries.”

Required:
Keeping in view the above scenario, what will be the effect of high demand of luxuries goods from abroad on the balance of payment of lower income countries?

NOTE: Give answer in JUST TWO LINES not more than that.

Solution:-
Due to the high demand of luxuries goods from abroad, there will be negitive effect on the balance of payment due to the increase in the trade deficite of the lower income country ,, so the balance of payment effect is surely negitive.

Another Solution:-
It will put negative impact and show (trade deficit) on balance of payments of lower income countries as luxuries goods require high payments in dollar form to countries from where they are imported.

Another Solution:-
wealth being wasted presently will negatively affect the natural law of income increase discussed earlier and will negatively effect the overall demand of luxury goods from abroad in the future.