HND Business Economics Assignment 2: Macroeconomics and Trade Analysis

This report provides a comprehensive analysis of the Czech Republic's economic landscape, addressing key macroeconomic aspects. The first task explores the relationship between the Czech Republic's imports, exports, and exchange rates, examining how currency fluctuations impact trade volumes and the balance of trade. The second task delves into the nation's fiscal policy, outlining its objectives, tools, and the different types of fiscal policies employed, including expansionary and contractionary measures. The report evaluates the impact of these policies on economic variables such as GDP, inflation, employment, and national debt. Finally, the third task investigates international trade and protectionism, comparing the production possibilities frontiers of Germany and Bangladesh, calculating opportunity costs, and discussing absolute advantages and gains from trade. It also examines the economic, ethical, and humanitarian impacts of trade protectionism, providing a well-rounded view of the Czech Republic's economy within a global context. The report includes relevant figures and data sources to support its arguments.

Running head: ECONOMICS AND FINANCE
Economics and Finance
Name of the Student
Name of the University
Course ID

1ECONOMICS AND FINANCE
Table of Contents
Task 1: Czech Republic imports and exports and exchange rate relationship................................2
Task 2: Czech Republic and Fiscal policy objectives.....................................................................5
Fiscal policy and main tools of fiscal policy...............................................................................5
Three main goals of fiscal policy for Czech Republic................................................................5
Types of fiscal policy...................................................................................................................6
Evaluation of different types of fiscal policy..............................................................................7
Impact of fiscal policy in Czech Republic on nation debt of Czech Republic............................9
Task 3: International trade and protectionism...............................................................................11
PPF for Germany and Bangladesh.............................................................................................11
Opportunity cost of Cars ad Cloth in Germany and Bangladesh...............................................13
Absolute advantage....................................................................................................................14
Gains from trade........................................................................................................................15
Economic, ethical and humanitarian impact of trade protectionism.........................................17
References......................................................................................................................................19

2ECONOMICS AND FINANCE
Task 1: Czech Republic imports and exports and exchange rate relationship
In determination of export and import volume of a nation, exchange rate plays an
important role. Exchange rate expresses the value of one country’s currency in terms of currency
of another nation. Value of the nation’s currency determines the volume of export and import by
affecting price of imported and exported goods. When value of currency falls, this implies the
country has to pay a larger amount for every unit of foreign currency (Arize, Malindretos and
Igwe 2017). This is known as depreciation of currency. The depreciation of currency is good for
importer importing goods of the concerned nation as they now have to pay a relatively lesser
price. This benefits the exporters by boosting their export demand. This is however bad for
importers of own nation as they have to pay a higher price for the imported goods valued in
foreign currency. The situation is reverse if value of domestic currency increases against the
foreign currency. When value of domestic currency increases this is a bad news for foreign
importers. Foreign importers then have to pay a larger price for the goods imported from the
nation (Asteriou, Masatci and Pılbeam 2016). Importers in the domestic nation however is
benefitted as imports become relatively cheaper to them. When value of a currency increases in
terms of foreign currency this is known as appreciation of currency. The volume of export and
import and associated trade balance thus is closely related with movement of currency exchange
rate.
Czech Republic is a highly open and export oriented economy. The main exports of the
nation include cars, computers, different parts of vehicles, machine parts, broadcast equipment
and others. The top export destinations are Germany, Slovakia, United Kingdom, France and
Poland. Major goods imported by the nation include machine parts, cars, broadcast equipment,
vehicle part and computer with imports mainly originating from China, Germany, Italy, Slovakia

3ECONOMICS AND FINANCE
and Poland (Oec.world 2020). Volume of export and import in the nation fluctuated with
variation in the currency exchange rate. The official currency of Czech Republic is Czech
Koruna. Apart of fluctuation in currency exchange rate imports and exports also vary depending
on various trade policies. Protectionism measures taken by the country and its trading partners
significantly influence trade volume. Czech Republic however is a highly open economy and
mostly relies on promotion of free trade policy. The average tariff rate in Czech Republic is only
1.79 percent (Data.worldbank.org. 2019). This shows a minimal degree of trade restriction and
reliance towards free trade.
Volume of export and import in Czech Republic in the last five years is shown in the
figure 1. In order to evaluate the relation between export and import and that of exchange rate,
trend exchange rate during the same time period is presented in figure 2.
2014 2015 2016 2017 2018
0
50
100
150
200
250
0
2
4
6
8
10
12
14
16
18
Export, Import and Trade balance
Export Import Trade balance
Year
Export and import volume
Trade balance
Figure 1: Export and import of Czech Republic
(Source: Data.worldbank.org. 2019)

4ECONOMICS AND FINANCE
2014 2015 2016 2017 2018
20.00
20.50
21.00
21.50
22.00
22.50
23.00
23.50
24.00
24.50
25.00
Exchange rate in Czech Republic
Year
CZK/USD
Figure 2: Trend in Czech Koruna exchange rate
(Source: Data.worldbank.org. 2019)
The volume of export in 2014 was recorded to be 171.54 billion USD. The associated
import volume was 158.32 billion USD. Since export was above the import the nation
experienced a trade surplus of amount 13.22 billion USD. The recorded exchange rate between
Czech Koruna and USD was 20.76. In 2015, exchange rate increases to 24.60 indicated a
depreciation of currency. Going by standard theory of exchange rate and trade volume, this
should have increased export while lowered export. However as shown by the recorded trade
statistics during this year both export and import declined in 2015. The decline in Czech’s export
during this time was mainly due to a decline in export to Russia because of the economic
sanction against Russia and other measures of retaliation (Lazarova 2015). Following this there
was a decline in both export and import of Czech. Since export dropped at a faster rate than the
import trade balance of Czech Republic with Russia went in deficit during this year (Tyll,
Pernica and Arltova 2018). For the next two years of 2017 and 2018 the domestic currency of

5ECONOMICS AND FINANCE
Czech Republic appreciated with recorded exchange rate being 23.38 and 21.73 respectively.
The volume of export is recorded to be 172.14 billion USD and 192.22 USD in 2017 and 2018
respectively. The associated volume of import in the two respective years were 155.90 billion
USD and 176.57 billion USD.
The above discussion though suggests a smooth flow of trade in Czech Republic ongoing
trade protectionism measures globally overheated the economy. The decision of US president to
impose tariff on goods that China imports to US triggered a trade war between the two large
economies of the world (bbc.com 2020). The trade war resulted from US protectionism measure
likely to impact Czech economy by affecting its trade volume. Most of the trade of Czech
Republic occurs with EU countries with EU nations accounting 84% of total trade volume. Of
this Germany alone accounted 39 percent. The tariff imposed by President Trump affected some
sector other than aluminum and steel. The proposed tariff on automobiles would damage car
industry of Germany which indirectly affected Czech economy. The global trade tension due to
several protectionism measures have overheated the economy of Czech and are expected to
disrupt the trade flow in future.
Task 2: Czech Republic and Fiscal policy objectives
Fiscal policy and main tools of fiscal policy
Fiscal policy refers to the policy measure adapted by the government of a nation for
stabilizing the economy in terms of adjustment to the government spending and tax rates
(Guilmi, Gallegati and Landini 2017). The two main tools with which fiscal policy works are
government expenditure and tax.
Three main goals of fiscal policy for Czech Republic

6ECONOMICS AND FINANCE
The three main goals of fiscal policy in Czech Republic are
 To achieve a stable growth.
 To achieve full employment (Ec.europa.eu. 2019).
 To maintain public debt below 3%.
Types of fiscal policy
Government implement two main types of fiscal policy depending on state of economy.
The two main forms of fiscal policy used by the government are expansionary fiscal policy and
contractionary fiscal policy. Fiscal policy is a demand side policy and affects economic activity
through influencing aggregate demand (Uribe and Schmitt-Grohe 2017). The equation for
aggregate demand is given by
AD=Consumption+ Investment +Government Spending+ Net Export
Government spending is one main component of aggregate demand and influences
aggregate demand directly. Another tool of fiscal policy is tax rate which influences aggregate
demand through affecting disposable income of household and consumption.
Expansionary fiscal policy
Government adapts expansionary fiscal policy when the economy undergoes a
recessionary phase. During recession there is a continuous decline in economic growth along
with a decline employment and price level. A boost in aggregate demand through necessary
policy stimulus can help the economy to recover recession. This is the time when government
takes expansionary fiscal policy. The expansionary fiscal policy is implemented either through
an increase in government expenditure or through a cut in tax rate (Gandolfo 2016). Rise in

7ECONOMICS AND FINANCE
government spending or decrease in tax increases aggregate demand. As aggregate demand
expands there is an rise in GDP and inflation in the economy. With expansion in aggregate
output more employment opportunities are created. As more and more people become employed
there is fall in unemployment rate within the economy.
Contractionary fiscal policy
Sometimes there are situations where an economy experiences excessive inflationary
pressure. This occurs when actual GDP exceeds the potential GDP of the economy creating an
inflationary gap. During this time, the economy needs some contraction to reach to the stable
long term potential GDP. Government then adapt contractionary fiscal policy either by sinking
government expenditure or by increasing tax rate. The contractionary fiscal policy brings down
the aggregate demand to a lower level (Heijdra 2017). When aggregate demand contracts there is
a decline in GDP and inflation within the economy. The contraction of aggregate output in turn
causes loss of some employment opportunity resulting in an increase in rate of unemployment.
Evaluation of different types of fiscal policy

8ECONOMICS AND FINANCE
Figure 3: Impact of expansionary fiscal policy
Figure 3 evaluates the impact of expansionary fiscal policy and associated impact on
major economy variables. The aggregate demand in the above figure is captured by the
downward sloping line AD. The corresponding aggregate supply curve is shown by upward
sloping line AS. Macroeconomic equilibrium is settled at E with equilibrium GDP and price
level are determined as Y* and P* respectively. Now, if government takes an expansionary fiscal
by increasing government spending or lowering tax then the AD curve shifts out to AD1 (Cantore
et al. 2019). Because of the expansion of aggregate demand macroeconomic equilibrium shifts
from E to E1. Corresponding to the new equilibrium GDP increases to Y1 and price level
increases to P1. With expansion of GDP as shown in the above figure, employment increases
lowering level of unemployment.

9ECONOMICS AND FINANCE
Figure 4: Impact of contractionary fiscal policy
The impact of contractionary fiscal policy in an economy is evaluated in the figure 4.
Here, when government adapt a contractionary fiscal policy by lowering spending or increasing
tax rate reduces the level of aggregate spending shifting in the aggregate demand curve to AD2.
At the lower level of aggregate demand, the economy attains new equilibrium at E2. The
contractionary fiscal policy thus lowers the GDP to Y2 and price level to P2. With decline in
GDP, there is a loss in employment opportunities which by lowering employment increase
unemployment level in the economy (Rezabek and Doucek 2018).
Impact of fiscal policy in Czech Republic on nation debt of Czech Republic
The adjustment of two main fiscal policy instruments that is government expenditure and
taxes influence national budget and public debt. Too much policy expansion though considered
to be supportive for economic growth, it may have an adverse effect on the economy in terms of
a higher debt burden. In case of Czech Republic, government though supports the economy to
achieve stable economic condition it however successfully keeps the public debt at a

10ECONOMICS AND FINANCE
significantly low level. Among the EU nations, Czech Republic is known to have the lowest
level of debt per capita. Government designs fiscal policy in a such a way that it can maintain a
public debt less than 3% (Oecd.org. 2015).
Figure 5: Government debt to GDP ratio
(Source: Tradingeconomics.com. 2020)
As shown from the above figure, there is a continuous decline in debt to GDP ratio in
Czech Republic in the last five years. Decline in government debt has made possible because of
the design of public policy.
The economic growth of Czech Republic in 2017 was 3.7 percent. The impressive
economic growth of the nation helped in strong performance of public finances. Both state and
local government accounted a surplus in this year with estimated surplus being 17 billion and 44
billion for both state and local government respectively. Government though adapted a fiscal
policy expansion in terms of raising investment expenditure it still experienced an overall surplus
because of above average increase in tax rate (mfcr.cz 2017). The national budget of Czech

11ECONOMICS AND FINANCE
Republic first accounted a surplus in 2016. The shift of the budget towards a surplus was mainly
due to a significant improvement in structural balance. In 2018, economic growth of the nation
slowed down to 3.0 percent. As the economy slowed that government needed to adapt an
expansionary fiscal policy. In order to support the economy, government increased its investment
spending. After week economic growth in the first quarter, government increased its investment
spending by 20 percent (mfcr.cz 2018). This resulted in a decline in government budget. In
recent years, external economic risks along with internal factors and problem of ageing
population has out continuous pressure of government budget. This creates a future pressure on
expenditure and public revenue. Government needs to incur a significant expenditure on health
care services, pensions and other long term care program. The ceiling of expenditure in this area
was initially set at 0.25 percentage point below the previous year. The resulted tightening down
of expenditure to -0.75% was due to absence of social reform ensuring a greater financial
stability. The fiscal projection suggests that a more fiscal policy expansion will lower budget
surplus of Czech Republic for next two years. The budget surplus which was 0.9 percent of GDP
in 2018 was fell to 0.5 percent and 0.3 percent in the respective years of 2019 and 2020 (mfcr.cz
2019). Consequently, public debt will continue to fall offering government sufficient opportunity
to support economic growth of the nation.
Task 3: International trade and protectionism
PPF for Germany and Bangladesh
Production possibility frontier of a nation illustrates the maximum amount of goods that a
country can possibly produce using all of its resources (Chacholiades 2017). The table below
provides information regarding production of cars and cloth in Germany and Bangladesh.