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exam practise economics -rianna > 4.1 A global perspective pt2 > Flashcards

4.1 A global perspective pt2 Flashcards

1
Q

Why is infant industries a reason to place protectionist measures

A

To protect new firms that would be unlikely to succeed at start-up due to the level of global competition. Once established support is removed
* Allows domestic firms to grow
* To develop E.O.S - gives them leverage to compete with big, international cooperations around the world.

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2
Q

Definition: sale of a G/S below its CoP

Why is ‘dumping’ a reason to place protectionist measures

A

Example: excess subsidies on given G/S will lead to excess supply so firms may sell them below CoP to other countries
* Countries where these products are being sold to will suffer
* Domestic industry cannot compete

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3
Q

Why is domestic unemployment a reason to place protectionist measures

A

When firms outsource production or cetrain industries experiencing structural unemployment, govt will step in to protect jobs.

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4
Q

Why is ‘unfair’ low cost labour abroad a reason to place protectionist measures

A

Many countries offer cheap labour & low-cost production due to poor environmental regulations. Protectionism can help apply pressure to bring about change in these countries

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5
Q

Why is to improve the C.A. deficit a reason to place protectionist measures

A

When M>X
Amount of £ leaving to country to support foreign firms are greater than £ entering to support domestic firms

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6
Q

Define tariff

A

A tariff is a tax on imported goods/services (customs duty)

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7
Q

Using the trade tariff diagram, how does the supply curve represent marginal CoP

A

Every extra unit being produced from Q1 to Q3 is being produced at an extra cost when domestic suppliers are producing it than if world suppliers were producing it.
This means resources are being provided to inefficient prudcers when it shouldve gone to world suppliers.

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8
Q

Analyse the trade tariff diagram

A
  • Q1-Q2 represents excess demand
  • W.S + tariff ↑ P from Pw to Pw + tariff
  • Domestic D contracted ↓ Q2 to Q4
  • Domestic S ↑ Q1 to Q3
  • Quantity of M ↓ Q1Q2 to Q3Q4
  • Govt revenue ↑ (tariff revenue generated for govt to collect)
  • D.W.L of C.S and world effiency
  • P.S ↑ and C.S. ↓
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9
Q

Definition: physical limit on imports

Effect of import quota’s

A
  • This limit is usually set below the free market level of imports
  • As cheaper imports are limited, a quota raises the market price
  • As cheaper imports are limited a quota may create shortages
  • Some domestic firms benefit as they are able to supply more due to the lower level of imports
  • This may increase the level of employment for domestic firms
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10
Q

Effect of subsidies given to producers/ suppliers

A
  • A subsidy lowers the cost of production for domestic firms
  • They can increase output & lower prices
  • With lower prices their goods/services are more competitive internationally
  • The level of exports increases
  • The increased output may result in increased domestic employment
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11
Q

Components of BoP

A
  • Financial account
  • Capital account
  • Current account
  • Net errors and omissions
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12
Q

What is the capital account

A

Recaords small capital flows between countries and is relatively inconsequential
E.g. Debt forgiveness, inheritance taxes, death duties, transfers of financial assets by migrants

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13
Q

What is money flowing in and out the financial account referred to

A

Money flowing in is recorded as credit (+)
Monet flowing out is recorded as debit (-)

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14
Q

What could a country do if theyre in a current account deficit ot surplus to balance the CA

A

Current account deficit= run financial account surpluses
Current account surplus= run financial account deficits

e.g. China is in a CA surplus, so they have lots of reserves (excess cash: selling more to the world than buying from world)- so they will invest in countries with a CA deficit like USA, investmemt must be safe and secure, have a good rate of return. This leads to a FA deficit

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15
Q

What is expenditure reducing policy

A
  • Aim to reduce spending on M in economy to decrease AD so people have low incomes= low MPM
    E.g. Contractionaly monetary policy, Increase I.R, decrease M.S
    Contractionary fiscal policy, decrease govt spending, increase taxation
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16
Q

Evaluate expenditure reducing policy

A
  • Conflict of objectives- low growth, unemployment, recession
  • Consumer and business confidence- if its high, AD may not fall
  • Ouput gap- if eocnomy is at Fe and AD falls, Y may not
  • MPM
17
Q

Why is expenditure switching policy used to correct a CA deficit

A

To target certain M and reduce import expenditure
-Switch spending on M towards domestic G/S instead

18
Q

Demand side causes of CA surplus

A
  • High Y abroad
  • Low Y at home (domestic)- reduce D for M
  • Weak E.R. (WIDEC)- More D for X so increased revenues , less expenditure for M
19
Q

Supply side causes of CA surplus

A
  • Low relative inflation- X more competitive
  • Low unit labour cots- high productivity, weak trade unions, low min wages
  • Strong investment (capital, technology)
  • Gains in CA
  • New resources discoveries
20
Q

Consequences for CA surplus

A
  • ↑(X-M), ↑AD, ↓ U, ↑ demand pull inflation
  • Appreciation the E.R.- more D for currency then supply of it- upward pressure on E.R.
  • Financial account deficit- buy too much debt from countries in CA deficit, whcih could be worthless assets= financial difficulty
  • Can harm international relations- could be using excessive protectionism= retaliation, trade wars
  • Sign of unbalanced economy: Too reliant on X (sales overseas)
    So not enough consumer spending, not enough production for domestic conumers e.g. China
21
Q

Define Exchange rates

A

The price of one currency in another currency

22
Q

Explain the floating exchange rate system

A
  • As with any market, if there is excess demand for the currency on the forex market, then prices rise (the currency is worth more)
    In a floating exchange rate system this is called an appreciation
  • If there is an excess supply of the currency on the forex market, then prices fall (the currency is worth less)
    In a floating exchange rate system this is called a depreciation
23
Q

Stronger£ (£ can buy more of another currency)

What can cause an appreciation in the £

Foreigners are demanding the pound so demand shifts right

A
  • Increase in relative I.R.- greater rate of return
  • Speculators anticipate increase in £
  • Increase in FDI - foreign firms move to UK and pay more on capital, workers wages using £
  • Increase in Y abroad- foreigners demand more X
  • Increase in competitivness (higher unit labour costs, increase inflation, increase investment) - Higher D for X, more X sold. Increase in X earnings
24
Q

Weaker £ (£ is exchanged for another currency)

What can cause a depreciation in the £

Supply shifts right

A
  • Decrease in relative I.R.- lower rate of return
  • Speculators anticipate decrease in £
  • Firms moving away from Britain
  • Increase in Y domestically- demand more M, UK buy in other currency
25
Q

How to support a fixed E.R.

A

To support a fixed E.R, the govt or central bank is required to hold large amount of currency reserves

26
Q

How would an increase in I.R. manipulate E.R.

A
  1. Increase I.R.
  2. Incentivises foreign investors to hold their money in domestic banks
  3. Hot money flow inwards
  4. Increase in value of E.R.
  5. Ad demand for currency increase
27
Q

How can floating E.R. correct a CA deficit in UK

A
  • M>X - more S of of £ than demand for £
  • Leads to depreciation in £ (downward pressure on E.R.)
  • Leads to WIDEC
  • Weak £, Imports Dear, Exports Cheap
  • D for X increase
  • Revenue generated from X will increase
  • Expenditure for M fall, leakages fall
28
Q

What is speculation

A

Speculation: the vast majority of currency trades are speculative. Speculation occurs when traders buy a currency in the expectation that it will be worth more in the short to medium term, at which point they will sell it to realise a profit

29
Q

Advantages of floating exchange rates

A
  1. Less need for currency reserves- domestic and foreign may not be viable and is costly
  2. Useful instrument for macroeconomic adjustment
  3. Partial automatic correction for a trade deficit
  4. Reduced risk of currency speculation- E.R. should reach an equilibrium which reflects PPP
  5. Freedom for domestic monetary policy- Use domestic monetary policy to deal with domestic issues in economy e.g. inflation
30
Q

Disadvantages of floating exchange rates

A
  • Volatility- if E.R. keeps fluctuating, this decreases incentives for foreign investors to invest in domestic currency
  • Self correction of trade deficits unlikely- other factors like speculative flows
31
Q

Advantages of fixed exchange rates

A
  1. Decrease E.R. uncertainity- stable, promotes foreign investment, trade= EASIER
  2. Some flexibility is permitted- got can devalue of revalue currency
  3. Decreases cost of trade - reduced hedging (buy now to avoid again future E.R. rates increasing)
  4. Discipline on domestic producers- cant rely on E.R. falling in value, to maintain competitivness, increase efficiency, invest in R&D + innovation
32
Q

Disadvantages of fixed exchange rates

A
  1. I.R. effects- I.R. used to maintain a fixed E.R. which may lead to low growth, hugh unemployment
  2. Large level of foreign currency reserves needed- expensive and not viable
  3. Speculative attacks if E.R. set too low or too high- no guarantee that E.R. decided will correct PPP value- may be over/devalued
33
Q

Define international competitivness

A

The ability of a nation to compete successfully overseas to sustain improvements in living standards and output

34
Q

Factors determining international competitivness

A
  1. ULC’s e.g. NMW, skills, productivity
  2. Labour flexibility
  3. Labour skills
  4. Tax regimes- lower Y tax- attract workers from abroad, low CT= new capital, technology= improves efficiency
  5. Innovation
  6. Infrastructure
  7. Regulation- enforces costs, elongates process of business
  8. Economic stability
35
Q

Why would govt spending on infrastructure improve international competitivness

A
  • Transportation e.g. new roads, bridges, airports, railways
  • Improve efficiency- easier to move G/S around country and internationally
  • Quicker and cheaper= lowers costs
  • Productive efficiency
  • Translates to lowers P’s
  • Improves price competitivness
36
Q

Lower coorporation/ income tax & tax allowances on investment

Why would tax incentives improve international competitivness

A
  • Lower coorporation- increased retained profits of business= investment on technology, capital, software, R&D, innovation- Lower CoP - Lower P’s
  • Tax allowances on investment (up to a given threshold, if a firm ringfences profit, they wont be taxed)
  • Gives an incentive for businesses to put more moeny aside to use to invest
37
Q

Why would deregulation improve international competitvness

A

e.g. stringent hiring and firing laws, environmental laws, health and safety standards
* Lowers CoP
* Improve productive effieciency
* Lowers P’s

exam practise economics -rianna (19 decks)

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