Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What primarily drives the fluctuation in the trade cycle?

1. The interest rates set by central banks

2. Long-term trends in GDP growth

3. International trade agreements

4. The direct effects of taxation policies

The correct answer is: Long-term trends in GDP growth

The fluctuation in the trade cycle is primarily driven by long-term trends in GDP growth. This is because the trade cycle, which refers to the ups and downs of economic activity over time, is closely linked to overall economic performance as measured by GDP. A rising GDP generally indicates increased economic activity, leading to expansions in production, consumption, and employment. Conversely, when GDP growth slows or contracts, it signals a downturn in economic activity, often resulting in reduced spending, investment, and rising unemployment. While other factors such as interest rates set by central banks can influence economic activity and the trade cycle, they typically do so in response to the underlying trends indicated by GDP growth rather than being the primary drivers. International trade agreements and taxation policies also play significant roles, but their impact is usually felt within the broader context of overall economic conditions as reflected in GDP movement. Thus, long-term trends in GDP growth capture the fundamental changes in economic activity that drive the trade cycle fluctuations.