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Chapter 15: Problem 9

According to the theory of patterns of specialization and sustainable trade (PSST), economic activity can decline in the face of unchanged aggregate demand. How so?

Short Answer

Expert verified
According to the PSST theory, economic activity can decline in the face of unchanged aggregate demand due to increased efficiency from specialization or new technologies. The introduction of more efficient or specialized ways of producing goods or services could lead to less usage of resources while maintaining the same level of output. This reduction in resource usage can cause a decrease in economic activity.

Step by step solution

01

Understand the PSST Theory

Patterns of Specialization and Sustainable Trade (PSST) theory implies that economic activity can decline even though aggregate demand remains constant. This occurs due to a shift in industries or introduction of more efficient technologies that lead to reallocating resources more efficiently. This process helps to cut down costs and eventually, reduces the economic activity as less resources are required now to provide the same goods or services.
02

Identify Causes of Decrease in Economic Activity

Possible reasons for the decrease in economic activity, even with constant aggregate demand, could include: a) Specialization: If industries become more specialized, they can potentially produce goods or services more efficiently, requiring less resources and hence decreasing economic activity. b) Technological advancement: If new, more efficient technologies are introduced, fewer resources may be needed to provide the same level of output, also decreasing economic activity.
03

Explaining the Process

When industries become more specialized or technology advancements are introduced, some sectors can produce more efficiently. This efficiency increase results in less resource usage for the same level of output, causing a decrease in economic activity while keeping aggregate demand constant. The shift in production patterns and resource reallocation lead to more efficient systems. This efficiency could decrease the economic activity when the aggregate demand is constant because now less is required to produce the same quantity of goods or services.

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