"Sharp Contractions in a Country's Output and Employment Invariably Result

question 5

Essay

"Sharp contractions in a country's output and employment invariably result from a crisis in which the country suddenly loses access to all foreign sources of funds." Explain how the current account identity necessitates these contractions.

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Definitions:

Economies Of Scale

Cost advantages that a business achieves due to expansion in the scale of production, leading to a reduction in the cost per unit.

Natural Monopolies

Market conditions where a single supplier is the most efficient (due to high infrastructure costs or other barriers) in providing a particular good or service.

Public Utilities

Companies that provide essential services to the public such as water, electricity, and telecommunications, often subject to government regulation due to their nature of operation.

LRAC Curve

Long-Run Average Cost curve, showing the minimum average cost of production at different levels of output when all inputs are variable.