4.1 International Economics

Question 1

What is globalisation

Answer 1

The growing interdependence of countries and the rapid rate of change it brings about.

The increasing integration of the world’s local, regional and national economies into a single international market.

Question 2

What are the key factors that contribute to globalisation?

Answer 2

Improvement’s in transport infrastructure and operations.
Improvements in IT and communication
Trade liberalisation
International financial markets
TNC’s - large companies worldwide

Question 3

How do improvements in transport infrastructure and operations contribute to globalisation

Answer 3

Means there are quick, reliable and cheap methods to allow production to be separated around the world.

Question 4

How do improvements in IT and communication contribute to globalisation

Answer 4

Allow companies to operate across the globe

Question 5

How does trade liberalisation contribute to globalisation

Answer 5

Reduced protectionism has made it cheaper and more feasible to trade, which has been occurring since 1945. The breakdown of the soviet bloc and the opening of China has shown a whole area of the world for business to expand into.

Question 6

How do international financial markets contribute to globalisation

Answer 6

Have provided the ability to raise money and move money across the world, necessary for international trade.

Question 7

How do TNC’s contribute to globalisation

Answer 7

Have led to globalisation by acting to increase their own profit as they want to take advantage of low labour costs. They sell and produce their own goods all around the world and have the power to lobby governments.

Question 8

Positive impacts of globalisation on consumers

Answer 8

Have more choice as there are a wider range of goods available.
Lower prices as firms take advantage of comparative advantage and produce in countries with lower costs eg. Labour costs.

Question 9

Negative impacts of globalisation on consumers

Answer 9

Can lead to rising prices since incomes are rising and so there is higher demand for goods and services.

Many consumers worry about loss of culture

Question 10

Benefits of globalisation for workers

Answer 10

TNC’s tend to provide training for workers and create new jobs.
Positive employment opportunities for some
Increased migration leads to more skills which can increase Ad which increases the number of jobs.

Question 11

Negatives of globalisation for workers

Answer 11

Some have lost in terms of employment, for example large scale losses in the western world with jobs transferred to countries such as China and Poland.
Increased migration may affect workers by lowering wages.
As wages for high skilled workers increases, as there is more demand for work, inequality increases.
Those working in sweatshops will see poor conditions and low wages.

Question 12

Negatives of globalisation for producers

Answer 12

Firms who are unable to compete internationally will lose out.

Question 13

Positives of globalisation for producers

Answer 13

Firms are able to source products from ​more countries ​and sell them in more countries. This ​reduces risk since a collapse of the market in one company will have a smaller impact on the business.
They are able to employ low skilled workers much cheaper in developing countries and can ​exploit comparative advantage and have ​larger markets​, both of which can increase profits.

Question 14

Positives of globalisation for governments

Answer 14

May be able to receive higher taxes as TNC’s pay tax and so do the people they employ.
If the government uses the correct policies they can maximise the gains and minimise the losses.

Question 15

Negatives of globalisation for governments

Answer 15

TNC’s have the power to bride and lobby governments which could lead to corruption.

Question 16

Positives of globalisation for the environment

Answer 16

Means the world can work together to tackle climate change and share ideas and technology.

Question 17

Negatives of globalisation for the environment.

Answer 17

The increase in demand for raw materials is bad for the environment.
The increase in trade and production leads to more emissions.

Question 18

What does globalisation increase?

Answer 18

Investment within countries. This incentivises countries to make supply-side improvements to encourage TNC’s to operate in their countries.

Question 19

How can the power of TNC’s cause political instability?

Answer 19

They may support regimes which are unpopular and undemocratic but that don’t benefit them or could hinder regimes which don’t support them.

Question 20

What May companies do in the long term which will have a negative impact? (Regarding globalisation)

Answer 20

As comparative cost advantages change over time, they may leave the country if it no longer offers an advantage. This will cause structural unemployment and reduce growth

Question 21

What does the theory of comparative advantage state

Answer 21

That countries find specialisation mutually advantageous if the opportunity costs of production are different.

Question 22

When does absolute advantage exist

Answer 22

When a country can produce a good more cheaply in absolute terms than another country.

Question 23

When does compatriot be advantage exist

Answer 23

When a country is able to produce a good more cheaply relative to other goods produced.

Question 24

Limitations of the theory of comparative advantage

Answer 24

Assumes there are no transport costs.
Assumes all costs are constants and there are no economies of scales.
Assumes all goods are homogenous, not realistic to real life.
Assumes that factors of production are perfectly mobile.
Wether trade will take place depends o the terms of trade between the countries.

Question 25

Advantages of specialisation and trade

Answer 25

Comparative advantage shows how it can increase world output if countries specialise, increasing global economic growth.
Allows countries to benefit from economies of scale which reduces costs and decreases prices gloablly.
Allows countries to make use of their different factors of production.
Trade Enables consumers to have a greater choice.
Trade increases competiton which encourages innovation.

Question 26

Example of a country that doesnt trade and specialise

Answer 26

North Korea isolated themselves for political reasons, countries like this find their economies tend to stagnate.

Question 27

Disadvantages of specialising and trading

Answer 27

Can lead to over-dependence, can cause problems if their are price falls in exports or imports are cut off for political reasons.
Can cause structural employment.
The environment will suffer due to transporting goods
May be a loss of culture

Question 28

How has specialising and trading caused problems for the UK

Answer 28

Areas such as Manchester suffer from unemployment as their traditional industries declined for example ship building

Question 29

What two ways can patterns of trade be considered

Answer 29

Geographical pattern of trade (the countries a nation trades with)

Commodity pattern of trade (the types of products that are traded internationally)

Question 30

What countries does the UK mainly export to

Answer 30

42% to EU
21% to US

Question 31

Where do the UK mainly import from

Answer 31

50% EU

Question 32

How has trade with China expanded

Answer 32

From 26th largest export in 1999 to the 6th largest export in 2020

Question 33

Where in the world does the UK rank in terms of exports and imports

Answer 33

The worlds eleventh largest exporter
Fifth largest importer

Question 34

What types if goods and services does the UK trade

Answer 34

39% business services
Main export is road vechiles
Export machinery and capital goods

Question 35

What key things do the UK import

Answer 35

Non-monetary gold
Road vechiles

Question 36

What factors influence the pattern of trade

Answer 36

Changes in comparative advantage (eg. Labour skills, human capital and productivity)

Emerging economies (China is now a major manufacturer)

Trading blocs and bilateral trading arrangements since 1945

Changes in relative exchange rates

Question 37

How may changes in exchange rates affect patterns of trade

Answer 37

Depreciation helps exports

Question 38

How has the UK pattern of trade changed recently

Answer 38

Since 2000 exports have fallen and imports have risen.

Question 39

Why has there been a decline in UK exports recently

Answer 39

Similar to that seen in most other industrialised countries - is due to competition from emerging and newly industrialised economies such as China, India and Brazil

Question 40

Why have UK imports tended to rise

Answer 40

Goods are cheaper to buy from less developed countries

Question 41

Who has the comparative advantage recently

Answer 41

Developing countries have gained an advantage in the production of manufactured goods due to their low labour costs.

Question 42

How does trading blocs and bilateral trading agreements affect the pattern of trade

Answer 42

Increase the level of trade between certain countries and so influence the pattern of trade because trade increases between these countries and decreases between others.

Question 43

What does the terms of trade measure

Answer 43

The rate of exchange of one product for another when two countries trade

Question 44

What does terms of trade tell us

Answer 44

The quantity of exports that need to be sold in order to purchase a given level of imports

Question 45

When is movement in terms of trade favourable

Answer 45

If the terms of trade increases as the country can buy more imports with the same level of exports

Question 46

What is a deterioration of the terms of trade

Answer 46

When export prices fall or import prices rise

Question 47

Calculation for terms of trade

Answer 47

Average export price index / average import price index X100

Question 48

What are the key four factors that influence the terms of trade

Answer 48

A rise/ fall in the world price of a country’s main exports of goods/services

Changes in the R/Ex

A fall in relative inflation rates

Tariffs

Question 49

How does a rise or fall in the world price of a country’s main exports of goods/services affect the terms of trade

Answer 49

Countries become heavily reliant on primary commodities often see volatile terms of trade due to fluctuation in world prices

Question 50

How does changes in the R/ Ex affect terms of trade

Answer 50

Brings about a rise/ fall in the prices of imported products

Question 51

How does a fall in relative inflation rates affect terms of trade

Answer 51

An extreme example of this is a prolonged period of price deflation when domestic and export prices are falling - causing a deterioration in the terms of trade.

Question 52

How can having rich resources in a country be a curse

Answer 52

The ownership of miners,s and fuels can cause a appreciation of the exchange rate (and an increase in the terms of trade)

This results in a loss of competitiveness of their manufactured goods and services leading ton slower economic growth

Question 53

What is a trading bloc

Answer 53

A group of countries that have joined together to reduce or eliminate trading barriers between participating countries

Question 54

What is a customs union

Answer 54

A group of countries agree to:
1. Abolish tariffs and and quotas between member nations to encourage free movement of goods and services.
2. Adopt a common external tariff on imports fro non-members.

Question 55

Example of a customs union

Answer 55

Mercosur (Argentina, Brazil, Paraguay, Mexico, Venezuela)
The EU became a customs union in 1957 until 1992

Question 56

What is a single market (common market)

Answer 56

Represents a deeper form of economic integration than a customs union

Free movement of factors of production - labour and capital added to the free movement of goods.

The concept is broadened to include economic policy harmonisation in the areas of health and safety legislation and monopoly and competition policy.

Question 57

Example of a single market (common market)

Answer 57

EEA - European economic area (27 EU members plus Iceland, Norway, Liechtenstein)

Question 58

What is an economic/monetary union

Answer 58

Member adopt a single currency with a single official interest rate across the currency area

Question 59

Example of an economic/ monetary union

Answer 59

Eurozone

Question 60

What is trade creation

Answer 60

A shift in spending from a higher cost domestic source to a lower cost source within a trading bloc, as a result of the abolition of tariffs.

Question 61

What is trade diversion

Answer 61

Membership of a trading bloc makes trade more attractive compared with trading with non-members

Question 62

Advantages of trading blocs

Answer 62

More intense competition
Increased economies of scale
Technical diffusion
Increase in FDI
Trade creation

Question 63

Disadvantages of trading blocs

Answer 63

Trade diversion
More mergers and acquisitions
Structural unemployment
Distortion of comparative advantage
Loss of independent monetary policy

Question 64

What are the two main functions of the World Trade Organisation

Answer 64

Trade liberalisation: encourages countries to lower protectionist barriers

Responsible for ensuring that countries comply with signed trade agreements

Question 65

What are the key challenges for the world Trade organisation

Answer 65

Shifting global economic power

Fragmentation of the global trading system

Question 66

Criticisms of the world trading organisation

Answer 66

Allows rich countries to exploit third world workers

Environmentally natural resources can be plundered

Poorer countries are forced to lower trade barriers

Destroys native cultures replacing them with westernised culture

Exploitation of third world economies

Rules set by rich countries for own advantage

Question 67

Costs of free trade

Answer 67

Exploitation of workers - low wage workers would be paid more in developed countries

Reducing trade barriers can cause unemployment as foreign competition forces some firms to close

Question 68

What are the 6 reasons to restrict free trade

Answer 68

Infant industry restrictions
Job protection
Protection from potential dumping
Protection from unfair competition
Terms of trade
Danger of over specialisation

Question 69

What is the infant industry argument?
WHy may it be a reason to restrict free trade

Answer 69

An infant industry is one that is just being established within a country. They need to be able to build up a reputation and customer base and will have to cover a lot of sunk costs, meaning their AC will be higher. Therefore, the industry would be unable to compete in the international market and so the government protect them until they are able to compete on an equal level. This has worked well in ​Japan but in general tends to be ineffective as firms grow to be inefficient and the government tend to have a poor record of ‘picking winners’. There may be other more effective methods, such as subsidies.

Question 70

How many job protection be a reason to restrict free trade

Answer 70

Government may be concerned that as domestic producers lose out to international firms there willl be job losses.
This would have negative economic consequences and be politically unpopular

Question 71

What is dumping

Answer 71

When a country or company with surplus goods sells these goods off to other areas of the world at very low prices, harming domestic producers in those countries.

Question 72

Why may protection from potential dumping be a reason to restrict free trade

Answer 72

The government may need to intervene to protect domestic producers who are unable to to compete with firms that are willing to make a loss.

Question 73

How can protection from unfair competition be a reason to restrict free trade

Answer 73

Domestic producers may be unable to compete with a firm that is heavily subsidised by the government, some will argue the government should intervene to protect domestic producers from this

Question 74

How can terms of trade be a reason to restrict free trade

Answer 74

If a country buys a large amount of imports for a certain good, this will increase demand for that good and hence increase the price. This will worsen the terms of trade and so therefore they can buy less imports with the amount of exports. Restrictions will reduce supply of the good and lead to a fall in the price received by the importer, so improve the terms of trade.

Question 75

How can danger of over specialisation be a reason to restrict free trade

Answer 75

Some people believe no country should be reliant on another for goods/services

Question 76

What is a tariff

Answer 76

Taxes placed on imported goods which make them more expensive to buy, making people more likely to buy domestic goods

Question 77

What is a quota

Answer 77

Limits places on the level of imports allowed into a country, meaning people are forced to buy domestic goods if they want that good and the quota is already filled up

Question 78

How are subsidies used for domestic products

Answer 78

Payments to domestic producers which lower their costs and help them to be more competitive by enabling cheaper prices.

Question 79

What are some examples of non tariff barriers countries can use

Answer 79

An embargo - a total ban on imported goods

Introduce import licensing when countries/firms need a license to be able to import. By reducing teh number of licenses they give out they can restrict the level of imports.

The use of legal and technical standards.

Question 80

What is the impact of protectionist policies on consumers

Answer 80

There are higher prices for consumers as they are unable to buy imports at the cheaper price.

Domestic producers have less incentive to be efficient which means they can suffer from less choice and poorer quality.

Question 81

Positive Impact of protectionist policies on domestic producers

Answer 81

Domestic producers mainly benefit as they have less competition

Question 82

Negative impact of protectionist policies on domestic producers

Answer 82

May suffer from higher costs if there are controls on the imports they need for production

Question 83

Impact of protectionist policies on foreign producers

Answer 83

Will lose out as they are limited in where they can sell their goods. Inefficient domestic producers are kept in production whilst efficient foreign ones one out.

Question 84

Effect of protectionist policies on workers

Answer 84

Evidence suggests little difference to employment figures.

Arguably allowing inefficient firms to l close would be better for workers in teh long run.

Question 85

Impact of protectionist policies on the government in the:
- short run
- long run

Answer 85

In the short run governments benefit as they gain tariff revenues and they are politically popular

However it can lead to an inefficient economy which stifles growth

Question 86

Impact of protectionist policies on living standards

Answer 86

The imposition of import controls results in deadweight welfare loss.

Trade wars - breakdown in international relations as other countries retaliate. This can cause a reduction in both trade and growth.

Question 87

Impact of protectionist policies on equality

Answer 87

Has a regressive effect on the distribution of income.

The rise in price affects the poorest members of society far more than the well off.

Question 88

What does the balance of payments do

Answer 88

A balance sheet which Keeps track of transactions and the money a country is sending and receiving due to foreign trade

Question 89

What is the current acccount split inot

Answer 89

Trade in goods, trade in services and income and current transfers

Question 90

What is the capital account

Answer 90

Relatively unimportant as it mainly records transfers and emigrants taking money abroad or bringing to the UK, or government transfers such as debt forgiveness to Thurd World countries.

Question 91

What is the financial account

Answer 91

More important than the capital account, it is split into three main parts; foreign direct investment, portfolio invest,ent and other investments.

Foreign direct investment is the flow of money to purchase part of a foreign firm. Portfolio investments are the same thing but where they buy less than 10% of the company. Other investments include loans, purchasing of currency and bank deposits.

Question 92

Which countries have a:
Current account balance
Current account surplus
Current account deficit

Answer 92

France and Child
China and Germany
Britain and USA

Question 93

What are short term causes of deficits and surpluses

Answer 93

High levels of consumer demand.
If household spending grows more quickly than the supply side of the economy can deliver, the only way of meeting this demand is by importing those goods and services.

Question 94

How can the exchange rate impact deficit and surpluses

Answer 94

A strong exchange rate reduces the Uk price of imports and leads to an expenditure switching effect away from domestically produced output. The high value of the pound improves the terms of trade between the UK and other countries, allowing us to buy and consumer more imports with each pound. It increases the price of exports so leads to a fall in the value of exports.

Question 95

What does high inflation do to deficit and surpluses in the balance of payments

Answer 95

Will decrease exports since it will increase their price compared to goods produced by other countries

Question 96

What is a medium term cause for deficits or surpluses on the balance of payments

Answer 96

As a country loses its ​comparative advantage​, people will transfer their purchases to other countries and the UK will need to switch resources to production of other things. Similarly, the growth of ​cheap imports from countries like China ​has caused a substitution effect.

Question 97

What are the long term causes of trade deficits or surpluses

Answer 97

Lack of capital investment
Deindustrialisation
Natural resources
Competitivity
Corruption

Question 98

How does lack of capital investment effect trade

Answer 98

Means firms use older and more out of date technology. This contributed to a lack of productivity.

Question 99

How does deindustrialisation affect trade

Answer 99

Deindustrialisation in the The Uk has led to a decrease in the relative importance of industry and manufacturing in the economy. This makes it more difficult to export, since services are harder to export.

Question 100

What is trade like for countries with more natural resources

Answer 100

Tend to export more

Question 101

What makes a country more competitive and how does this affect trade

Answer 101

More exports
High labour productivity or a reputation for high quality

Question 102

How does corruption in a country affect trade

Answer 102

Find it more difficult to export

Question 103

What are the two main policies of reducing imbalance

Answer 103

Demand side policies
Supply side policies

Question 104

What are demand side policies that reduce imbalance

Answer 104

Monetary or fiscal policy can be used to reduce AD. This reduces income so reduces demand for imports. It should be effective since there is high income elasticity for imports.

Question 105

What is the negative of using demand side policies to reduce imbalance

Answer 105

They are only short term and limit output of the economy, causing a reduction in living standards and growth

Question 106

What are examples of supply side policies to reduce imbalance

Answer 106

Measures to improve productivity and efficiency or improve quality. This could include competition policy, improving labour of improving infrastructure.

Seek and encourage industries to exploit opportunities in export market overseas and focus resources on industries where the UK has a real comparative advantage, accepting some industries should close. Q

Question 107

What is the problem with supply side policies to reduce imbalance

Answer 107

Politically unpopular and will cause job losses in the short term

Question 108

What are forms of expenditure switching policies for reducing imbalance

Answer 108

Tariffs or quotas will reduce the attractiveness of imports

Attempt to control inflation

Devalue the pound to make exports cheaper

Question 109

What is the problem with using tariffs or quotas as a method of control

Answer 109

Likely to cause trade wars as other countries implement protectionist policies.

Question 110

What is the problem with controlling inflation as method of reducing imbalances

Answer 110

Will lead to a fall for domestic goods and therefore could cause unemployment and a fall in growth

Question 111

What is the problem with devaluing the pound to rebalance trade

Answer 111

Will not always work

Question 112

Why did brexit make people question the balance of payments

Answer 112

Uncertainty and fear, due to fears over the response of the financial markets

Question 113

What happens if a country builds up a constant surplus

Answer 113

Tend to build up a stock of assets abroad

Question 114

What happens if a country has a constant deficit

Answer 114

They will owe more and more to foreign creditors.

Question 115

When May imbalances become a problem

Answer 115

If imbalances are large

Question 116

Today what is conuntrys outlook on having deficits

Answer 116

Less of a concern
The US and UK have no problem financing their deficits and borrowing has not built up unsustainable debts

Question 117

When do current account imbalances become a problem

Answer 117

When governments can’t repay their foreign currency debts

Question 118

Stereotypes for coutnrys with deficits and surpluses, are these true?

Answer 118

Countries with large deficits are seen as having a problem, whilst those with large surpluses are seen as being successful but in reality, those with surplus cause just as much instability as those with deficits.

Question 119

How many current account surpluses cause losses for citizens in a country

Answer 119

If they don’t see the high living standards which they could enjoy for consuming more

Question 120

What is the exchange rate

Answer 120

The purchasing power of a currency in terms of what it can buy of other currencies

Question 121

What is the spot exchange rate

Answer 121

Teh actual exchange rate for a currency at current prices, which can change in a minute and minute basis

Question 122

What are froward exchange rates

Answer 122

Involve providing a currency at some point in the future for an agreed rate. It is usually used by companies who want to reduce uncertainty and know the actual cost they will pay.

Question 123

What is the bilateral exchange rate

Answer 123

The value of one currency agaisnt another eg. £1=$2

Question 124

What does the exchange rate index show

Answer 124

Teh value of a currency agaisnt a basket of currencies weighted against the proportion of trade that that country does with each currency and gives an indication of the overall strength of the currency in the market. (The us, Uk and euro would be heavily weighted in the basket of currencies)

Question 125

What is a free floating system

Answer 125

Where the value of the currency is determined purely by market demand and supply of the currency, with no target set by the government and no official intervention in the currency markets.
Affected by both trade flows and capital flows.
Uk has a floating exchange system

Question 126

Arguments for floating exchange rates

Answer 126

Mean the central bank doesn’t need to maintain a particular exchange rate so doesn’t need to buy pounds in the market to keep it at the target.

It is able to auto correct a trade deficit as a large trade deficit will cause a fall in the value of the pound, since supply of pounds is high and demand is low. The fall in the pound will make exports cheaper and imports more expensive so many reduce the trade deficit.

Reduces the risk of currency speculation, since speculation is most attractive when the currency is over or undervalued, and floating exchange rates reduces this because the price is determined by the market.

Question 127

What is managed floating

Answer 127

Where the value of the currency is determined by demand and supply but the central bank will try to prevent large changes in the exchange rate on a day to day basis.

Question 128

How is managed floating controlled?

Answer 128

By buying and selling currency and by changing interest rates

Question 129

What currencies have managed floating

Answer 129

Brazilian real, Swiss franc, Japanese yen

Question 130

What is a fixed system for exchange rates

Answer 130

When governments set their currency against another and that exchange rate does not change.

Question 131

Arguments for a fixed exchange rate

Answer 131

Avoids currency fluctuations, which encourages trade and investment as firms/ individuals know the true costs of the deal.

Reduces the cost associated with trade, as firms have to spend less on currency hedging which is the process of agreeing on forward exchange rates.

Stable exchange rate may reduce inflation as there is not a sudden reduction in the value of the currency leading to a rise in imports and therefore inflation.

Question 132

Arguments agaisnt a fixed exchange rate

Answer 132

Can cause conflicts with objectives, if the rate falls below the governments set level they have to intervene by raising interest rates which will have a negative effect on other policies.

Less flexibility and it is diffficukt to respond to temporary shocks

Question 133

What is an appreciation of the currency

Answer 133

An increase in the value of the currency using floating exchange rates

Question 134

What is a depreciation of the currency

Answer 134

Fall in the value of the currency under floating exchange rates

Question 135

What is a revaluation of the currency

Answer 135

When the currency is increased against the value of another under a fixed system

Question 136

What is a devaluation of the currency

Answer 136

A decrease in the value of one currency agaisnt another under a fixed system

Question 137

factors affecting floating exchange rates

Answer 137

Changes in demand and supply of pound
Speculation

Question 138

What are the two main methods the government can use to influence the value of their currency?

Answer 138

Use interest rates

Use fold and foreign currency reserves

Question 139

How can the government use interest rates to influence teh value of their currency

Answer 139

An increase in interest rates will strengthen the pound as people will convert their money to pounds to put them in English banks, so demand for pounds to put them in English banks, so demand for pounds will rise. Falls in interest rates will decrease demand for the pound so weaken the currency

Question 140

How can the government use gold and foreign currency reserves to manipulate the value of their currency

Answer 140

If the value of the pound is too high and they want to weaken it, they can increase supply by buying foreign currency or gold with pounds. To

strengthen the pound, they can increase demand by selling their foreign currency or gold in exchange for pounds. Central banks have found that this method tends to have little impact on currencies in the long term. They are also able to limit supply of currency by introducing currency controls, and by doing so they can fix the value of the currency.

Question 141

What is competitive devaluation/ depreciation

Answer 141

where a country ​deliberately intervenes in foreign exchange markets to drive down the value of their currency to provide a competitive boost to their exporting industries. A weaker currency will encourage exports and discourage imports and therefore the balance of payments should improve assuming the Marshall-Lerner condition.

Question 142

What is the problem with competitive devaluation/ depreciation?

Answer 142

Can cause inflation and this may reduce competitiveness, leading to a fall in the balance of payments.

Other countries may follow and reduce their currency as well.

Question 143

What is the Marshall Lerner condition

Answer 143

States that a depreciation/ devaluation of the exchange rate will lead to a net improvement in the trade balance provided that the sum of the price elasticity of demand for exports and imports > 1

Question 144

What are impacts of changes in exchange rates

Answer 144

Economic growth and unemployment

Rate of inflation
FDI

Question 145

How can changes in exchange rates cause economic growth an unemployment

Answer 145

A weaker exchange rate is likely to increase exports, since they become cheaper, and decrease imports so lead to an increase in AD. This will increase employment and economic growth.

Question 146

How can changes in the exchange rate affect the rate of inflation

Answer 146

Falls in the exchange rate will increase inflation as imports become more expensive, causing a rise in prices and a fall in SRAS. Also, the net exports section of AD will increase and so inflation will rise further.

Question 147

How does a change in exchange rate change FDI

Answer 147

A fall in the currency may increase FDI because it becomes cheaper to invest. However, if the currency is continuing to fall then this is an indication that an economy has serious economic difficulties which will discourage investment.

Question 148

What do goods need to be competitive internationally

Answer 148

Cheap, good quality design or after sales and good marketing

Question 149

What are the two main measures of international competitiveness

Answer 149

Relative unit labour costs: ​Unit labour costs are total wages divided by real output: the cost of employing workers for each unit of good. These are measured in an index number with one year chosen as a base year. Unit labour costs in the UK are compared to other countries. A rise in relative unit labour costs in the UK shows that labour cost per unit is rising faster in the UK compared to other countries and so the UK is becoming less competitive.
Relative export prices: This is the price of UK exports compared to the exports of the UK’s main trading partners. A rise in relative export prices means UK export prices have risen more than other countries’ export prices and so the UK has become less competitive.

Question 150

What are the main factors influencing international competitiveness

Answer 150

Exchange rates
Productivity
Regulation
Investment
Taxation
Inflation
Flexibility
Competition and demand at home
Factors of production openness to trade

Question 151

How do exchange rates influence international competitiveness

Answer 151

A rise in the pound will cause exports to become more expensive and thus make goods less competitive as their price changes

Question 152

How does investment influence international competitiveness

Answer 152

Investment infrastructure improves productivity and ensures firms can deliver and produce their product reliably, cheaply and efficientl. Investment in research and development allows firms to develop new products, which increases competitiveness as countries won’t have these products and new technology which reduces costs and increases efiiciency

Question 153

How does inflation effect international competitiveness

Answer 153

Low levels of inflation increase competitiveness since UK goods increase in price by less than goods in other countries and so they become more competitive over time

Question 154

How will flexibility influence international competitiveness

Answer 154

If the labour market is flexible it will improve competitiveness as the labour can respond to changes in demand.

Question 155

How can competition and demand at home influence international competitiveness

Answer 155

A good level of domestic demand will mean that firms in the country will already be producing in large numbers, experiencing economies of scale. Similarly high levels of competition will mean firms will have to have good quality or cheap products to survive.

Question 156

How does openness to trade influence international competitiveness

Answer 156

If trade barriers are low other countries are likely to have low barriers on goods coming from the Uk, meaning it is easier and cheaper to export.

Question 157

Benefits of competitiveness

Answer 157

By being competitive a country will experience current account surpluses. This allows them to invest overseas and build up a surplus of assets overseas, on which interest, profit and dividends can be earned.

More likely to attract inflows of foreign investment

Employment likely to increase because more goods are being produced, since more goods are exported and less are imported, so more are sold internationally and domestically. A rise in demand for labour will lead to a rise in wages.

Economic growth due to efficieny and investment a

Question 158

Problems with being internationally competitive

Answer 158

Competitiveness can be easily lost.

A current account surplus may lead to a rise in the exchange rate reducing competitiveness

Countries may become more dependent in overseas countries and will suffer is
F there is a global recession

Question 159

What effects demand for the pound

Answer 159

Amount of British good foreigners want to buy
Numbers of foreigners wanting to invest in UK
those who want to visit UK
Those who want to place money in British banks

Question 160

Factors affecting supply of pound

Answer 160

Amount of foreign goods people in the UK want to buy
Number of British firms that want to invest abroad
Amount of British people wanting to go on holiday
Amount of British people who want to place money in British banks