15 - Exchange Rate Systems and Economic Growth and Development Flashcards

Question

What is an example of a country, which shows how HDI is not a great indicator of development?

Answer 1

Equatorial Guinea has very low life expectancy and education, but have a very high GNI due to having lots of oil.

Answer 2

The average world HDI rose from 0.48 in 1970 to 0.68 in 2010. Mainly due to the growth of East Asia, the pacific and South Asia (China especially).

Answer 3

13th Is not at the very top due to a relatively low life expectancy, form the diet of the Americans and bad health care system.

Answer 4

Because many of these countries do not allow for women to go the school

Answer 5

Money, goods and services and ‘soft loans’ given by the government of country’s or organisations to help another country. People argue aid promotes economic development more than trade.

Answer 6

- Military Aid - A ‘hard’ loan - A ‘soft’ loan - Disaster Relief - ‘Tied’ aid - Technical Assistance - Debt Relief

Answer 7

Aid (usually money) has to be spent buying the weaponry of the donor country, questionable whether it can be classified as aid.

Answer 8

‘Hard’ Loan - A loan (usually hard money), has to be paid back at market rate of interest. ‘Soft’ Loan - A loan made to a country, has to be paid back at a below-market rate of interest or no interest.

Answer 9

Usually given by non-governmental organisations (NGOs), like Oxfam, it is humanitarian aid such as food and clothes from a natural disaster or other disaster. Like in Nepal earthquake in 2015 uk government supplied aid. Some NGOs are corrupt, OXFAM sexually abusing children in Haiti after the earthquake. However this aid stops human cost but does not really promote economic development, as in Sudan war and famine has not stopped so they have become dependent on the aid to survive. Not Development.

Answer 10

Take the form of a ‘soft’ loan or gift of money but must be paid back in exports, usually natural resources, same as the money given or more give back for free. Countries can exploit developing countries.

Answer 11

Lending their experts or funding expertise to less economically developed countries. Africa has been the top recipient of Chinese aid. Build infrastructure especially transport routes train lines, roads. However they employ Chinese workers and extort the countries of their natural resources.

Answer 12

It is partial or total forgiveness of debt. Debt can be a cause of poverty as financial resources are diverted from infrastructure, education and healthcare. Debt forgiveness can allow a country to import more and increase populations standard of living, improves government finances, to be spent on public services. However, forgiveness could encourage more borrowing in future and corruption.

Answer 13

- Economic growth is the increase in a country’s real national output - This is caused by increases in the quality or quantity of factors of production, which cause an outward shift in the PPF. - Economic development refers to living standards, freedom (from oppression) and life expectancy. - It covers a more moral side to economic growth and it is normative. - Development is also concerned with how sustainable the economy is and whether the needs of future generations can be met.

Answer 14

Includes gross domestic product (GDP) per head, information on the distribution of income, morality rates and health statistics

Answer 15

An index based on life expectancy, education and per capita income indicators, which ranks the world's countries into four tiers of human development. These are: (i) very human development, (ii) high human development, (iii) medium human development, (iv) low human development

Answer 16

Measures economic and social welfare of countries over time

Answer 17

It combines the statistics of the mean number of years of schooling and the expected years of schooling

Answer 18

Uses a life expectancy range of 25 to 85 years.

Answer 19

- Measures GNI adjusted to PPP per capita. - GDP was used instead of GNI, but to account for remittances and foreign aid, GNI is now used, since it reflects average income per person

Answer 20

- A value close to 1 is indicative of a high level of economic development - A value close to 0 suggests a low level of development

Answer 21

- Allows for comparisons between countries to be made, based upon which countries are generally more developed than other countries - Provides a much broader comparison between countries than GDP does - Education and health are important development factors to consider, and it can provide information about the country’s infrastructure and opportunities. It also shows how successful government policies have been

Answer 22

- HDI does not consider how free people are politically, their human rights, gender equality or people’s cultural identity. - HDI does not take the environment into account. It could be argued that this should be included to focus on human development more. - HDI does not consider the distribution of income. A country could have a high HDI but be very unequal. This can mean many people might still be in poverty.

Answer 23

- Human Poverty Index (HPI) - Gender-related Development Index (GDI)

Answer 24

- It measures life expectancy, education and the ability of citizens to meet basic needs. - There are two types: HPI-1 and HPI-2. The former measures poverty in developing countries and the latter measures poverty in developed countries.

Answer 25

- In HPI-1, the longevity part of the index measures the probability of living to the age of 40 - The education component considers the adult literacy rate - The ability of citizens to meet basic needs is measured by the percentage of underweight children and the percentage of people not using improved water sources.

Answer 26

- For HPI-2, the probability of not surviving to at least the age of 60 is used - The percentage of adults which do not have literacy skills is calculated, and poverty is calculated by those living below the poverty line - This is below 50% of median income.

Answer 27

It measures the relative inequality between men and women - It combines HDI with a consideration of gender. E.g., it will consider differences in life expectancies, income and education between genders.

Answer 28

- Trade liberalisation - Promotion of FDI - Removal of government subsidies - Floating exchange rate systems - Microfinance schemes - Privatisation

Answer 29

- Free trade is the act of trading between nations without protectionist barriers, such as tariffs, quotas or regulations - World GDP can be increased using free trade, since output increases when countries specialise - Therefore, living standards might increase and there could be more economic growth

Answer 30

- FDI is the flow of capital from one country to another, in order to gain a lasting interest in an enterprise in the foreign country. - FDI can help create employment, encourage the innovation of technology and help promote long term sustainable growth. It provides LEDCs with funds to invest and develop.

Answer 31

- Government subsidies could distort price signals by distorting the free market mechanism - A free market economist would argue that this could lead to government failure. There could be an inefficient allocation of resources because the market mechanism is not able to act freely - E.g. The government might end up subsidising an industry which is failing to has few products

Answer 32

The value of the exchange rate in a floating system is determined by the forces of supply and demand

Answer 33

- Provision of financial services - Involves borrowing small amounts of money from lenders to finance enterprises

Answer 34

- It increases the incomes of those who borrow, and can reduce their dependency on primary products - It allows them to break away from aid and gives borrowers financial independence - Microfinance loans detach the poor from high interest, exploitative loan sharks. They could help businesses to be set up. - Since the money goes directly to Small and Midsized Enterprises (SMEs), it can stimulate employment

Answer 35

- The government sells a firm so that is no longer in their control - The firm is left to the free market and private individuals

Answer 36

- Economists will argue that the private sector gives firms incentives to operate efficiently, which increases economic welfare as firms operating on the free market have a profit incentive, which firms which are nationalised don't - Firms have to produce the goods and services consumers want which increases allocative efficiency and might mean goods and services are of a higher quality - By selling the asset, revenue is raised for the government (this is only a one-off payment)

Answer 37

By using interventionist strategies

Answer 38

- Development of human capital - Protectionism - Managed exchange rates - Infrastructure development - Promoting joint ventures with global companies - Buffer stock schemes

Answer 39

- The skills base in the economy would improve and this would improve productivity and allow more advanced technology to be used as workers will have the necessary skills - Businesses struggle to expand where there are skills shortages. It also limits innovation - By developing human capital, the country can move their production up the supply chain from primary products, to manufactured goods and to services which can earn them more

Answer 40

- Can help reduce a trade deficit as they will be importing less due to tariffs and quotas on imports - Can protect infant industries - Is usually short term until the industry develops, at which point the industry can trade freely - Does have risks e.g. could distort the market, lead to a loss of allocative efficiency, tariffs being regressive, etc.

Answer 41

- It combines the characteristics of fixed and floating exchange rate systems - This is when the exchange rate floats on the market, but the central bank of the country buys and sells currencies to try and influence their exchange rate

Answer 42

- E.g. transport, energy, water and telecommunications - Lack of development can lead to e.g. rising food prices, reoccurring power cuts leading to electricity affecting transport and more - Employment can be boosted with improved roads, railways and airport constructions

Answer 43

When a partnership is formed between two firms based in multiple countries

Answer 44

- Allows the firm to participate in international trade, without the responsibilities involved of it - Helps technological knowledge to be transferred, which can help improve and develop small companies - They open up new markets for small firms, so they can distribute their products to customers - Spreads their risk - Helps firms penetrate a foreign market (usually difficult due to barriers to entry)

Answer 45

- Could help reduce price volatility in the agriculture market - Helps incomes of farmers to remain stable as fluctuations in the market are reduced and increases consumer welfare

Answer 46

- Primary product dependency - Savings gap: Harrod-Domar model - Debt - Access to credit and banking - Infrastructure - Education/skills - Corruption - etc.

Answer 47

Raw materials in industries e.g. agriculture, mining and forestry

Answer 48

- When developing countries rely on these products this could lead to volatility of commodity prices that can make it hard for workers to plan for the future, and it means incomes of farmers are hard to predict - A fall in the price leads to a fall in export incomes making it hard to fund their infrastructure and education - Relying on these products isn't sustainable as they could be over extracted and run out

Answer 49

- In developing countries, there is only limited wealth, which means money cannot be put aside for the future, and they can only afford to spend in the short run - The model states that investment, saving and technological change are required in an economy for economic growth. The rate of growth increases if the savings ratio increases. This leads to increased investment and technological progress, which leads to higher productivity - Growth will increase with more saving or a small capital output ratio

Answer 50

There's a low marginal propensity to save in some countries, or that there might be a poor financial system - Funds might not lead to borrowing and investment - Could be inefficiency in the workforce

Answer 51

The debt crisis emerging in the developing world threatens the fight against poverty and inequality

Answer 52

Without a safe, secure and stable banking system, there is unlikely to be a lot of saving in a country

Answer 53

- Poor infrastructure discourages MNCs from setting up premises in the country. - This is since production costs increase where basic infrastructure, such as a continuous supply of electricity, is not available.

Answer 54

- Important for developing human capital - Adequate human capital ensures the economy can be productive and produce goods and services of a high quality - Helps generate employment and raise standards of living

Answer 55

- Prevents normal economic activity from taking place - Corruption diverts scarce resources away from more productive uses to protect less efficient resource use - Production costs and consumer prices will rise

Answer 56

- Saudi Arabia (fixed to US Dollar) - Denmark (fixed to the Euro)

Answer 57

- Macroeconomic and microeconomic government policies e.g. demand-side fiscal policy and monetary policy, supply-side policy - Redistributive policies - Foreign exchange controls

Answer 58

In a fixed exchange rate system, the supply of the currency can be manipulated by the central bank, which can buy or sell the currency to change the price to where they want. In the diagram, the supply has been increased (S1 to S2) by selling the currency so more is on the market (Q1 to Q3). The currency depreciates as a result (P2 to P3), which makes exports more competitive.

Answer 59

Supply has fallen from S1 to S2 possibly from speculative selling of currency. This drives the market price below the low level. This requires the central bank to intervene. The central bank buys up their own currency. Which therefore increases the demand of the currency as there is less on the market, increasing the exchange rate price so it is above the lower price.

Answer 60

- US dollar - Japan - Australia - UK sterling

Answer 61

Managed exchange rate systems combine the characteristics of fixed and floating exchange rate systems. The currency fluctuates, but it doesn’t float on a fully free market. This is when the exchange rate floats on the market, but the central bank of the country buys and sells currencies to try and influence their exchange rate.

Answer 62

China has previously kept the Yuan undervalued by buying US dollar assets to make their exports seem relatively cheaper.

Answer 63

An increase in interest rates, relative to other countries, makes it more attractive to invest funds in the country because the rate of return on investment is higher. This increases demand for the currency, causing an appreciation. This is known as hot money.

Answer 64

This is used by banks to help to stimulate the economy when standard monetary policy is no longer effective. This has inflationary effects since it increases the money supply, and it can reduce the value of the currency. QE is usually used where inflation is low and it is not possible to lower interest rates further.

Answer 65

The Bank of England uses this to manage the UK’s gold and foreign currency reserves, as well as managing the MPC’s pool of foreign currency reserves. It involves buying and selling foreign currency to manipulate the domestic currency. China kept large reserves of the US Dollar by purchasing government bonds, in order to undervalue the Yuan.

Answer 66

1) Reduce Need for currency Reserves 2) Freedom for domestic monetary policy 3) Automatically Achieving balance of payments equilibrium. 4) Improving Resource Allocation

Answer 67

1. Volatility and capital inflows 2. International Trade Uncertainty 3. May cause Cost-Push inflation 4. May cause Demand-Pull inflation

Answer 68

1. Low Exchange Rate Uncertainty 2. Reduction in the Cost of Trade 3. Discipline on domestic producer

Answer 69

When you maintain fixed exchange rates, government need large level of domestic currency but also foreign currency. This is extremely costly. Don’t need this in floating.

Answer 70

Allows you to set interest rates for domestic needs, such as to control inflation. Whereas a fixed exchange rate will be determined by events in the outside world, so will not be solely domestic. As a fixed exchange rate has to change interest rates to keep a same fixed exchange rate. In a fixed economy exchange rate system, domestic objectives are often sacrificed to the pursuit of the external policy objective of maintaining an exchange rate target.

Answer 71

For efficient resource allocation, market prices must accurately reflect shifts in demand and changes in compétitivity in the world, such as new invention or discovery of materials. Free floating exchange rates should respond to this. A fixed exchange rate will become eventually become OVERVALUED OR UNDERVALUED as competition changes and s demand

Answer 72

One of the most significant drawbacks of a free-floating system is the potential for exchange rate volatility. Currencies can experience rapid and unpredictable fluctuations, which can introduce uncertainty for businesses engaged in international trade and investment. Less Businesses confidence, therefore less FDI and investment for businesses. Investment planning difficult

Answer 73

It can also affect the exports and imports of a country, which could cause a lot of unemployment if an industry is affected in particular. For example, higher exchange rates more imports less exports, as exports are less competitive.

Answer 74

If a country has a higher rate of inflation then it will lose trading competition with other competitors and the exchange rate will have to fall to restore competitiveness. Falling exchange rate increases import prices, which raise the rate of domestic cost-push inflation. Workers react by demanding a higher wages to be be able to pay for the higher prices goods. This increased inflation then eroded the export competitiveness initially won by the fall of the exchange rate. Eventually causing another fall in the exchange rate, so the spiral continues.

Answer 75

A fall in the exchange rate causes a shift in AD which can create demand-pull inflation if increases too much (use knowledge of demand-pull inflation).

Answer 76

Allows for firms to plan investment, because they know that they will not be affected by harsh fluctuations in the exchange rate. Higher business confidence. Higher FDI. Trade is a lot easier.

Answer 77

Currency hedging - buying your currency in advance as you believe it will change in price. But in a fixed exchange rate you do not have to worry about this.

Answer 78

- To maintain competitiveness, the only way firms can ensure this is by increasing efficiency and innovation, as the exchange rate will not change to increase exports. Promotes efficiency. Creates lower prices for consumer in the long run. - Poses an anti-inflationary discipline on a country aswell.

Answer 79

- Balance of payments distribution - Large foreign currency reserves needed - Overvalued and undervalued currency - Reduced Freedom of using interest rates and monetary policy as tools.

Answer 80

The balance of payments does not automatically adjust to economic shocks.

Answer 81

It can be costly and difficult for the government to hold large reserves of foreign currencies.

Answer 82

The government and the central bank do not necessarily know better than the market where the currency should be, do not have perfect information.

Answer 83

An agreement between a group of countries to share a common currency, and usually to have a single monetary and foreign exchange rate policy.

Answer 84

Members of a monetary union share the same currency.

Answer 85

The Eurozone. A common central monetary policy is established when a monetary union is formed. The single European currency, the Euro, was implemented in 1999 to form the Eurozone.

Answer 86

The Euro, for example, floats against the US Dollar and the Pound Sterling.

Answer 87

- Member nations are required to control their government finances, so budget deficits cannot exceed 3% of GDP - Gross National Debt has to be below 6% of GDP - Inflation has to be below 1.5% of the three lowest inflation countries - The average government bond yield has to be below 2% of the yield of the countries with the lowest interest rates. This ensures there can be exchange rate stability.

Answer 88

The participating countries have more currency stability, and the currency is less prone to speculative shocks. This gives future markets more certainty, so there is more investment and growth potential. There are fewer admin fees and less red tape when travelling abroad or exchanging money. This also benefits firms which trade with the different member states. It is especially beneficial to small firms, who benefit from the time and money saving of a common currency. The German monetary credibility might result in all member states having a lower interest rate. This might encourage more investment and spending, which might create more jobs.

Answer 89

Labour mobility is limited across Europe due to language barriers. Moreover, the differences in economic performance between member countries means a common monetary policy might not be effective. The exchange rate is not flexible to meet each country’s need, such as if they need a boost in exports. Member nations lose sovereignty when there is a common monetary union. This means that countries with a strong economy have to cooperate with countries that have weaker economies. They cannot adapt their policies to meet each individual requirement. The one-off cost of joining a currency union of changing labels and prices can be significant. Lack of fiscal policy coordination, lead to high level of government debt. This has built up and lead to countries such as Greece going through a financial crisis.

Answer 90

Exchange rates can not be changed. So interest can not be changed as it will change the exchange rate.

15 - Exchange Rate Systems and Economic Growth and Development Flashcards

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