In the Advanced Level Economics exam, knowing the theory is only half the battle. To score an ‘A’ grade, you must demonstrate how that theory applies to the real world.
The recent economic challenges in Sri Lanka (2022-2026) provide the perfect case study for your Macroeconomics essays. Examiners are looking for students who can connect textbook definitions to current events. Here is how to explain Sri Lanka’s economic situation using three key concepts from your syllabus.
1. Demand-Pull vs. Cost-Push Inflation
You have studied the two types of inflation, but can you identify which one impacted Sri Lanka?
- The Concept: Cost-Push Inflation occurs when the costs of production rise, shifting the Aggregate Supply (AS) curve to the left.
- The Real-World Application: When fuel and electricity prices increased in Sri Lanka, transport and manufacturing costs skyrocketed. This is a classic example of Cost-Push Inflation. In your essay, you can draw an AS shift graph and mention “rising energy costs in Sri Lanka” as the primary cause.
- Exam Tip: Don’t just draw the graph. Label the shift as “Impact of Fuel Price Hike.”
2. Exchange Rate Depreciation
The relationship between the Dollar and the Rupee is a favorite topic for exam questions.
- The Concept: Currency Depreciation is when the value of a domestic currency falls relative to a foreign currency under a floating exchange rate system.
- The Real-World Application: When the LKR depreciated against the USD, the price of imported goods (like milk powder and gas) increased. This links directly to the “Pass-through effect” in your syllabus.
- Exam Tip: Use this example when answering questions about “The impact of exchange rates on domestic price levels.”
3. Balance of Payments (BOP) Deficits
The “Dollar Crisis” is effectively a Balance of Payments crisis.
- The Concept: A deficit in the Current Account occurs when money flowing out (for imports) exceeds money flowing in (from exports/remittances).
- The Real-World Application: Sri Lanka faced a shortage of foreign reserves because our import expenditure was historically higher than our export income. You can discuss policies like “Import Restrictions” (banning vehicles) as a government measure to correct this BOP deficit.
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