What will be the effect of high demand of luxuries goods

Reference no: EM13244657

Suppose a growing world with positive real income and economicgrowth. There are some lower income countries producing goods forbasic necessities of life. If income of the poor people belongingto lower income countries increases, they move towards theluxurious goods like cars and air conditioners etc. Since, incomeelasticity of luxurious goods is positive i.e. as income increases;demand also increases. So, with the increase in income, demand ofluxurious goods from abroad will increase because such types ofgoods are not produced domestically in lower incomecountries."

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

Reference no: EM13244657

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