4.1 International Economics Flashcards

Question

What is the **Hecksher Olin** principle

Answer 1

Countries export what they can most easily and abundantly produce

Answer 2

The pattern of trade refers to how a country trades with other countries and in which direction. Trade flows refer to where the countries exports and imports go

Answer 3

1. **Comparative Advantage** e.g. deindustrilisation in UK led to moving to other places such as Poland 2. **Emerging Economies** As countries grow, likely to need more imports such as China International trade contributes 20% of LIC's economies compared to 8% of US 3. **Trading blocs and bilateral trading agreements** Leaving EU meant that the UK had a 14% fall in trade w them 4. **Relative exchange rate** UK’s trade deficit with Europe is due to the strength of the pound. China have kept their currency weak in order to increase their trade surplus by making exports more competitive.

Answer 4

* UK/USA run a persistent current account deficit * China and Germany run a consistent surpluss

Answer 5

China lower labour costs --> gives a omparative advantage in manufactured goods. * Chinese currency relatively undervalued. China has often sought to maintain an undervalued currency to make exports cheaper. * In the Euro, German exports become relatively cheaper because in the Euro, there is no appreciation within the Eurozone * It also reflects a higher marginal propensity to consume in the UK and the US. This means more willing to spend income.

Answer 6

the quantity of exports that need to be sold in order to purchase a given level of imports. an improvement if buy more imports with the same level of exports. Detoriation if converse

Answer 7

* **Exchange rate**. depreciation cause a deterioration in the terms of trade. * **Commodity prices**. If a country produces mainly primary products, then falling commodity prices worsens their terms of trade. * **Higher inflation**. A relatively higher inflation rate will increase the price of exports relative to imports and improve the terms of trade- but depreciation on FX * **Demand for products**. rising export demand will push up export prices, causing an improvement in the terms of trade. Long-run: * Improvement in productivity will decrease terms of trade * changing incomes - Prebish Singer Hypothesis --> primary goods decline in price propotionately so those dependent on them will see fall in terms of trade

Answer 8

countries will need to export more goods to finance the same quantity of imports. * A deterioration in the terms of trade could mean higher import prices and cost-push inflation. * A long-term decline in the terms of trade can lead to lower living standards, because the country can afford relatively fewer imports * Beneficial if caused by depreciation; if demand elastic then increase in exports

Answer 9

If PED of exports and imports is inelastic, a favourable movement in terms of trade would improve the current account on the balance of payments if it is elastic, a favourable movement would worsen the current account

Answer 10

, since if it is caused by a rise in export prices, exports will fall and if it is caused by a fall in import prices, imports will rise. Both of these causes a reduction in production within the country and so a fall in jobs and output

Answer 11

suggests a long term decline in living standards as less imports can be bought.

Answer 12

1. Free Trade Area 2. Customs Union 3. Single/Common Market 4. Economic Union 5. Monetary Union 6. Fiscal Union

Answer 13

● Preferential trading areas (PTA): These are where tariff and other trade barriers are reduced on some but not all goods traded between member countries. ● Free trade areas (FTA): These occur when two or more countries in a region agree to reduce or eliminate trade barriers on all goods coming from other members. Each member is** able to impose its own tariffs and quotas on goods it imports from outside the trading bloc. **

Answer 14

A customs union involves the removal of tariff barriers between members and the acceptance of a common external tariff against non-members. members may negotiate as a single bloc with third parties such as other trading blocs or countries. (FTA + Common External Tariff)

Answer 15

hen members trade freely in all economic resources so barriers to trade in goods, services, capital and labour are removed. They impose a common external tariff on imported goods from outside the market significant level of harmonisation of micro-economic policies 'aim to create a single market'

Answer 16

A common market as well as a common external tariff but free to pursue independent macro economic policy

Answer 17

– Economic Union plus common currency and common monetary policy. (e.g. Eurozone).

Answer 18

A fiscal union is an agreement to **harmonise tax rates, to establish common levels of public sector spending and borrowing, and jointly agree national budget deficits or surpluses**. The majority of EU states agreed a fiscal compact in early 2012, which is a less binding version of a full fiscal union.

Answer 19

* there should be free movement of labour, capital mobility and wage and price flexibility, fiscal transfers from one country to another when a country is performing poorly, and countries should share the same business cycle. The main problem for the EU is the** lack of automatic fiscal transfers**, for example these would have helped Greece, Spain and Portugal following the financial crisis of 2007-08.

Answer 20

* prices are fixed as all currencies are the same and there are reduced exchange rate costs. * It becomes easier for prices to be compared across the union and so MNCs are less able to price discriminate. * There are financial costs in starting a new currency and with one breaking them * Loss of policy independence can be bad for countries e.g. black wednesday, greece

Answer 21

Without a unified external tariff, trade flows would become distorted A common external tariff effectively removes the possibility of arbitrage

Answer 22

Union members must negotiate collectively with non-members or organisations like the WTO as a single group of countries. While this is essential to maintain the customs union, it means that members are not free to negotiate individual trade deals. Also, it makes little sense for a particular member to impose a tariff on the import of a good that is not produced at all within a that country. e.g. banana tariff 10.9% Members that trade relatively more with countries outside the union, such as the UK, may not get their ‘fair share’ of tariff revenue.

Answer 23

* These are agreements between neighbouring countries e.g. South-East Asia, Latin America, Africa and the EU. * The WTO often calls these regional trade agreements preferential trade agreements, because they are exclusive to a certain number of countries.

Answer 24

* Most trade is with neighbours so large effect * enable more free trade --> trade --> increase economic growth * They are a potential stepping stone to more inclusive trade agreements.

Answer 25

* WTO argues they should be preferable since FTA should involve all countries * PTA can conflict with WTO global trade treaties * Leads to conflict between other trading blocs * Increasesd complexity --> NTB

Answer 26

* Greater trade and gains from comparative adv. --> EoS * Increased FDI * Clout for international negotiations * More flexible labour markets

Answer 27

* Regional inequality due to geographical immobilities e.g. difficult to move from Spain to Germany to get a job. * Increased specialisation --> structural unemployment * The UK experienced trade diversion when joining the EU, because agricultural tariffs to Commonwealth countries increased. * Free movement of labour may cause friction over housing and overpopulation.

Answer 28

when tariff agreements cause imports to shift from low-cost countries to higher-cost countries; concentrates production in countries with a higher opportunity cost and lower comparative advantage. typically occurs w a common external tariff

Answer 29

* decline in consumer surplus * DWL * Loss of EU efficiency in net loss area * also net loss to society

Answer 30

increase in economic welfare from joining a free trade area, such as a customs union due to a reduction in tariffs allowing for lower prices * increase in consumer surplus, equal to area 1+2+3+4 * * Domestic producers will sell less as consumers buy cheaper imports (decline in producer surplus is shown by area 1) * Government lose tax revenue (from import tariffs) (shown by area 3)

Answer 31

If demand and supply are inelastic, the effect will be much lower.

Answer 32

If you cut import tariffs, other countries are likely to reciprocate and reduce tariffs on your exports. Therefore, there will also be an extra benefit from increased exports.

Answer 33

Often domestic job losses are more visible, than the gains from cheaper prices. e.g. nafta caused rust belt 700k america and 2 million agricultural mexico

Answer 34

* responsible for trying to promote and regulate free trade and trade agreements between countries. * Forum for agreeing and resolving conflict * Help trade flow except when conflicts with other objectives

Answer 35

World Bank stats show how **world exports as a % of GDP have increased from 13% in 1970 to 30%** just before the financial crisis of 2008. In the past decade, world exports as a share of GDP have flatlined, with no rise since the peak of 2008.

Answer 36

1. Use of abdundant resources - e.g. oil in UAE 2. **Comparative Advantage** 3. Greater Choice for Consumers - Preference Similarity Theory e.g. Primark and Gucci 4. **Economies of Scale** - Apple designs their computers in the US but contract the production Asian factories 5. Global economic development - reduction in absolute poverty (90 million raised from poverty in India) 6. **Encourage FDI** - Poland 7. **Increased competition** to increase efficiency + stop domestic monopoly 8. Engine of Growth - **World Trade has increased by avg. of 7% since 1945** 9.

Answer 37

1. **Infant industry argument** - free trade leads to primary sector dependence/dumping so need to diversify 2. **Cultural homogenisation** - local brands have a cultural niche and expertise 3. **Displacement effects** - cause uncompetitive domestic industries to close down --> structural UE eval: creative destruction + new jobs in diff. industry to supplement TNC 4. Enviromental Costs

Answer 38

1. Promote free trade through **gradual reduction of tariffs** 2. Provide** legal framework for negotiation of trade disputes**. This aims to provide greater stability and predictability in trade. 3. **Trade without discrimination** - avoiding preferential trade agreements. 4. WTO is not a completely free trade body. It allows tariffs and trade restrictions under certain conditions, e.g. protection against 'dumping' of cheap surplus goods. 5. WTO is committed to protecting fair competition. There are rules on subsidies, dumping 6. WTO is committed to economic development. For example, recent rounds have put pressure on developed countries to accelerate restrictions on imports from the least-developing countries.

Answer 39

The WTO has over 160 members representing **98 per cent of world trade**. Over 20 countries are seeking to join the WTO. * Prevent trade war, according to (Bagwell and Staiger 2002) the **average tariff in 1930s was 50%. In 2000s, average tariff is 9%** the **value of WTO in preventing trade wars could be estimated at up to $340 billion per year** according to Ralph Ossa the value of WTO in preventing trade wars could be estimated at up to $340 billion per year

Answer 40

* Free Trade policies unfavourable to developing countries, Ha Joon chang argues it is ' *pulling away the ladder they used themselves to climb up* * Preventing development of infant industries * WTO still have lots of protectionism in areas such as agriculture **that favour developed countries** * 'Most favoured nation' principle - mean developing countires cannot give preference to local contractors over footloose TNCs (favour developed) * Damage to enviroment, cultural diversity * WTO structure is undemocratic +enbales rich countries to win what they desire

Answer 41

* free trade has been an important engine of growth for developing countries in Asia. Although there may be some short term pain, it is worth it in the long run. * Also the WTO has sought to give exemptions for developing countries; enabling in principle the idea **developing countries should be allowed to limit imports more than developed countries.** * Growth of world trade has reduced absolute poverty - 90 million India

Answer 42

* **Higher tariffs **(type of tax on imports). * **Non-tariff barriers** e.g. diff uk + eu regulation * Voluntary export restraint is effectively a type of quota where voluntary limits are placed on imports of goods. * **Embargo** . * Government subsidy e.g. Chaebols * Distorted exchange rate e.g. international yuan * Weakest environmental law. A way to attract certain types of business. * Administrative barriers

Answer 43

1. **Infant Industry** 2. **Job Protection** 3. Protection from dumping/unfair competition 4. Improve the terms of trade 5. Prevent over-dependence 6. Stop dangerous goods 7. Protecting **senile industries** 8. Reducing a deficit

Answer 44

· Monopoly from another country sells a good/service at or below costs temporarily, to increase market share and force out domestic firms to form a monopoly in a foreign market. · They will then increase price and exploit consumers as those firms gain a monopoly foothold. or Selling excess stock at a price that injures domestic comp e.g. chinese steel 9-14% tariff

Answer 45

* Prevent economic dumping * Need to diversify from a reliance on primary products: 1) Low YED in LR 2) Price Volatility

Answer 46

1. May **encourage firms to be inefficient** --> X-inefficiency 2. Retaliation 3. Political pressure group, may become politically difficult to remove because of vested interests. 4. Which industries to choose? 5. **Welfare loss **of tariff protection 6. May be a stronger case for subsidies

Answer 47

· By protecting against imports and promoting exports the value of M should fall and X should rise current account deficit, ceteris paribus · Makes it easier to finance an equilibrium A large C/account deficit will also likely mean that domestic multipliers are weaker, and growth can be restricted.

Answer 48

· As M decreases and X increases and as labour is a derived demand, protectionism would help to control cyclical unemployment and in the long run prevent structural unemployment. * The US uses steel tariffs as a method to protect domestic jobs in steel.

Answer 49

· Domestic control over key strategic industries is seen as favourable, for example nuclear power, and armaments. · Protects against importation of demerit goods, e.g. through embargo/law. Helps prevent over specialisation e.g. Banning Huawei

Answer 50

· Industries which may have had national significance – Jingoistic Culture/heritage E.g. Sunset industries in decline due to foreign comp/changing demand then there may be an argument to slow that decline, protect employment etc. This tends to be a weaker argument.

Answer 51

S world shifts up tariff of size (Pw + t – Pw) is introduced. That raises the price of chicken wings in the UK to Pw + t. Quantity supplied by domestic producers increases Q1 -> Q2 (extension of S domestic). · Quantity demanded contracts Q4 -> Q3. · Hence, imports shrink to (Q3 – Q2).

Answer 52

· Consumers: consumer surplus lost by area (Area 1 + Area 2 + Area 3 + Area 4) lost. · Government: gain in revenue of Area 3 · Domestic producers: domestic producers gain surplus Area 1. · Foreign producers: they lose revenue as tariff decreases the quantity of chicken wings imported. Deadweight welfare loss: due to tariff there is social surplus lost to nobody which is the DWL: Area 2 + Area 4.

Answer 53

the domestic supply curve shifts downwards by the size of the subsidy per unit: (Pw + subsidy – Pw). Domestic production increases Q1 → Q2 and the quantity imported shrinks to Q4-Q2

Answer 54

· **Government**: paying the subsidy of the green-marked area. · **Consumers**: **loss of the consumer surplus does not occur**, as the price of the rice does not change. · **Domestic Producers**: the price that they receive increases to Pw+subsidy. Their **revenue increase** from (Area 1 + Area 2) to (Area 1 + Area 2 + green-marked area). · **Foreign Producers**: their **revenue decreases** from (Area 2 + Area 3 + Area 4) to (Area 3 + Area 4) as rice imports shrank. **Deadweight welfare loss**: due to increased production by the inefficient domestic producers (over allocation of resources to those producers), Deadweight Welfare Loss (DWL) marked triangle Area 5 emerges. The green area is the size of the subsidy, everything in the green area apart from Area 5 goes to producers to increase their revenue. Hence, what is left in the green are goes to no one – that is why Area 5 is said to be a DWL

Answer 55

· Helps achieve government objective. · Can reduce imports and boost X · Tends to be more well tolerated than a tax on M from foreign countries (less likely to cause retaliation) More effective if PED’s are elastic

Answer 56

· Welfare loss · Helps to **create inefficiency** amongst domestic producers · PED may be inelastic of M therefore policy does not achieve objectives just harms domestic consumers. · Can lead to retaliation e.g. UK is a member of the WTO committed to free trade. There may also be sanctions for protectionism.

Answer 57

· This trade protection could be said to be more favourable than tariff as it does not lead to possible loss of living standards. but tariffs better for demerit goods However, consumers are affected by the government subsidising producers rather than funding more socially desirable projects. Also, to fund the subsidy, the government might have to increase taxes.

Answer 58

Same as tariff and just shifting or This leads to a fall in imports to just Q3-Q2 Domestic suppliers gain more revenue. The price rises to P quota and domestic suppliers, supply more Q1 to Q2. It can create domestic jobs.

Answer 59

Consumers pay a higher price and also total quantity falls from Q4 to Q3. Governments are not affected directly, as there is no income. There is a net welfare loss to society because the increase in producer surplus is outweighed by the decline in consumer surplus. World exporters will make less revenue – unless demand is very inelastic, meaning increase in price is greater than fall in quantity.

Answer 60

* Quotas cause a bigger fall in economic welfare because the government don’t gain any tax revenue * Quotas may be harder to enforce if it is difficult to count the amount of the good coming into the country. * Quotas could be more unfair; distribution political Quota better: * Quotas allow the country to be certain on the number of imports coming in, while tariffs depend on elasticity

Answer 61

a way to restrict trade using trade barriers in a form other than a tariff such as licenses or administrative barriers

Answer 62

A voluntary export restraint (VER) is a trade restriction on the quantity of a good that an exporting country is allowed to export to another country. This limit is self-imposed by the exporting country. Exporting countries often wish to impose their own restrictions than risk sustaining worse terms from tariffs or quotas

Answer 63

the exporting country's company can always build a manufacturing plant in the country to which exports would be directed. By doing so, the company will no longer need to export goods, and should not be bound by the country's VER.

Answer 64

a change in a country's economic and trade policy to allow for more imports, by lowering tariffs or dropping quotas. Often VIEs are part of trade agreements with another country or the result of international pressure.

Answer 65

ADV: Producers in the importing country experience an increase in well-being, though, as there is decreased competition, increased price, profits, and employment Disadv: VERs reduce national welfare, by creating negative trade effects, negative consumption distortions, and negative production distortions.

Answer 66

Japan imposed a VER on its auto exports into the U.S. as a result of American pressure in the 1980s. The VER subsequently gave the U.S. auto industry some protection against a flood of foreign competition. This relief was short-lived though, as it ultimately resulted in a rise in exports of higher-priced Japanese vehicles and a **proliferation of Japanese assembly plants in North America.**

Answer 67

During Protectionism per capita income in Latin America grew at an impressive 3.1 per cent per year. Since structural adjustment, it has been growing at a paltry 0.5 per cent

Answer 68

1. **Overvalued exchange rate**; worsens X-M 2. **Declining competitiveness**, 3. **Fast economic growth**; higher income means greater income consumption 4. **Low savings ratio.** Lower savings tends to cause higher consumer spending on imports. 5. **Capital inflows**. Large inflows of foreign capital enable the country to afford more imports and run a current account deficit. Capital inflows also increase the value of the exchange rate making exports less competitive

Answer 69

* Attracting FDI and hot money flows

Answer 70

1. **Potentially unsustainable**. borrowing can be unsustainable in the long term and countries will be burdened with high interest payments. 2. **Foreign claim on UK assets**. foreigners will have an increasing claim on UK assets, which they could require return of at any time. 3. **Depreciation** likely to cause depreciation in the exchange rate, leading to higher import prices and lower living standards. 4. **Reflection of economic weakness. **: **Declining competitiveness**, due to higher labour costs or declining productivity. * Lack of productive capacity/ infrastructure in the UK. * Declining comparative advantage in many manufactured goods.

Answer 71

1. **Used to finance investment** 2. **Inward investment can be beneficial for the economy**. If a current account deficit is financed by long-term capital flows, it can create jobs and more output 3. **Floating exchange rate will restore balance**. With a floating exchange rate, a large current account deficit should be reduced over time by a depreciation to restore competitiveness. 4. **Size of deficit**. .

Answer 72

1. **Devaluation / depreciation** lead to an improvement in net exports (X-M) and therefore improve the current account on the balance of payments. 2. **Reduce consumer spending**. Higher taxes and/or higher interest rates will reduce disposable income and cause lower spending on imports. This will improve the current account deficit. 3. Supply Side Policies: ○ Policies to raise labour productivity ○ Investment in human capital to boost productive capacity and competitiveness

Answer 73

* If (PED x + PED m > 1), then a devaluation will improve the current account while an appreciation will worsen it Essentially, if demand for exports and imports is elastic, then a depreciation will improve the current account.

Answer 74

In the** short term**, demand for imports and exports tends to be **inelastic** Therefore, after a devaluation, the current account can get worse before it gets better. However, over time, demand becomes more price elastic and the current account improves.

Answer 75

* can lead to **imported inflation**, because imports will be more expensive and we will get higher AD. **Relatively higher inflation can reduce the country’s competitiveness.** * Therefore, if we do get inflation, the improvement in the current account might only be temporary.

Answer 76

* It **represents an unbalanced economy** – dominated by exports and showing less consumer spending. * it means other countries will have a similar deficit. * In the Eurozone, current account imbalances are more of a problem because countries can’t rely on a depreciation to solve the imbalance

Answer 77

1. Allowing the exchange rate to appreciate, reducing competitiveness. 2. Encouraging consumer spending (e.g. lower income tax), leading to higher import spending.

Answer 78

Many industries rely heavily on key export industries remaining competitive – these include: * Transportation / freight / logistics businesses * Trade finance businesses e.g. Insurance and trade credit * Service businesses that operate in ports and airports Exports particularly important for regional economic performance

Answer 79

state-owned investment fund that is used to benefit the country's economy and citizens The money typically comes from a nation's budgetary surplus to funnel it into investments rather than simply keeping it in the central bank or channeling it back into the economy. to stabilize the country's economy through diversification and to generate wealth for future generations. Can be funded through **commodities** or **non-commodities**, financed by fx reserves

Answer 80

Following the mortgage crisis of 2006-2008, sovereign wealth funds helped rescue struggling Western banks CitiGroup, Merrill Lynch, UBS, and Morgan Stanley. This led critics to worry that foreign nations were gaining too much control over domestic financial institutions and that these nations could use that control for political reasons. projects that if sovereign wealth funds continue to grow at their current pace, they will exceed the annual economic output of the U.S. by 2015 and that of the European Union by 2016.

Answer 81

When the value of the currency is determined by market forces i.e. the supply and demand for currency

Answer 82

Where the value of a currency is set at a certain peg, compared to other countries e.g. fixing the Pound at £1 = €1.1

Answer 83

‘Semi fixed exchange rate’. This is a situation where there is no set exchange rate level but the Central Bank (or government) intervene, to try and influence the exchange rate. For example, if the value of the currency is falling, the Central Bank may use foreign exchange reserves to buy currency

Answer 84

This gives a measure of a currency against a tradeweighted basket of currencies. It is expressed as an index, where the value of the index will be 100 in the base year. weight given to each currency depends upon the proportion of transactions done with the country

Answer 85

This is the exchange rate after being adjusted for the effects of inflation, which more accurately reflects purchasing power.

Answer 86

This occurs when the government reduces the set level of the currency in a fixed exchange rate.

Answer 87

This occurs when the value of an exchange rate in a floating exchange falls. Caused by an increase in supply or fall in demand for the pound on the forex.

Answer 88

When the government increases the set level of the currency in a fixed exchange rate.

Answer 89

When the value of the currency in a floating exchange rate rises. Caused by an increase in supply or fall in demand for the pound on the forex.

Answer 90

· The current account will **depend on consumer spending **and the rate of economic growth. · It also depends on consumer spending in foreign countries (hence demand for exports) · It depends on Inflation (e.g. depreciation can cause imported inflation which reduces the competitiveness of exports) Firms may engage in insurance policies to hedge against exchange rate movements.

Answer 91

When an appreciation of the exchange rate initially causes the current account or trade balance to improve.

Answer 92

1. **Interest rates** will attract hot money 2. **Inflation. ** affects competitiveness 3. **Speculation**. If speculators believe the value of sterling will rise in the future, they will demand more, causing an appreciation. 4. **Economic growth** interest rates are likely to rise, to keep inflation low. This will encourage investors to buy Pounds, in anticipation of better returns. 5. **Current account**. A large deficit on the current account is likely to cause a depreciation in the value of the exchange rate. 6. **Open Market Operations** - Central Bank uses FX reserves to buy domestic currency on the forex

Answer 93

1. Use **foreign currency reserves** 2.** Change interest rates** 3. **Change money supply**. If a country wanted to depreciate its currency, it could print more money 4. **Fiscal / monetary policy**. If the government used tight fiscal policy (higher taxes), it could reduce inflation

Answer 94

* A government has only **limited foreign exchange reserves** e.g. In 1992, the UK government failed to protect the value of the Pound, because foreign currency markets had more buying power than the government. * The Central Bank could use interest rates to protect the currency but it would be at the cost of lower growth and higher unemployment. * To manage the exchange rate in the long-term requires efforts to tackle long-term competitiveness.

Answer 95

* A government has only **limited foreign exchange reserves** e.g. In 1992, the UK government failed to protect the value of the Pound, because foreign currency markets had more buying power than the government. * The Central Bank could use interest rates to protect the currency but it would be at the cost of lower growth and higher unemployment. * To manage the exchange rate in the long-term requires efforts to tackle long-term competitiveness.

Answer 96

* Export quantity falls, Import quantity increases * **Lower AD** --> cyclical UE esp in manufacturing and higher NRU if appreciation is sustaianed * Lower inflation, from cheaper imports and lower AD * Worsening of current account i.e. bigger deficit, because of decline in exports and rise in quantity of imports. * Foreign direct investment may fall. A rise in the exchange rate **may discourage FDI** (foreign direct investment), because it is now more expensive for foreign firms to invest.

Answer 97

* Marshall Lerner condition states an appreciation will only worsen current account, if PEDX + PEDM >1. * It **depends on other components of AD**, consumer bigger impact * **Inverse J Curve** * It **depends on productivity growth**. If the exchange rate appreciates because firms are becoming more productive, then they will remain competitive. * Capital Equipment + tech becomes cheaper --> inc productivity and LRAS * It **depends on the state of the economy**. If the economy is growing strongly and is near full capacity, **a rise in the exchange rate could help reduce inflationary pressure** and keep growth sustainable.

Answer 98

This is a situation where a government actively tries to reduce the value of its currency, to gain a competitive advantage by: * Selling its own foreign currency and buying foreign assets e.g. China has bought US$3.12 trillion to keep the Chinese currency undervalued against the dollar. * Pursue loose monetary policy e.g. low interest rates and quantitative easing (increasing money supply).

Answer 99

* increase exports, create employment and reduce its current account deficit, but may be at the expense of other countries * It may cause inflation: a rise in import prices + require printing money, which also causes inflation. * It doesn’t deal with the fundamental economic issues. A depreciation gives a ‘relatively easy’ improvement in competiveness but this may prove short-lived. It can avoid firms dealing with the long-term issues of productivity and competitiveness.

Answer 100

* Replacing domestic currency with Euros. * No possibility of fluctuating exchange rates within the Euro area. * A **common monetary policy**. Interest rates are set by the ECB for the whole Eurozone area. * **Rules about size of budget deficits** (3% of GDP). Fiscal stability pact though, in practice, this is often broken.

Answer 101

1. **Lower transaction costs**; Lower costs have been estimated to be worth 1% of GDP. 2. **Eliminate exchange rate fluctuations** more confidence about future export prices. 3. **Increased inward investment.** 4. **Greater price transparency/comparibility**. should hopefully lead to greater price competition and easier for firms to identify the cheapest suppliers. 5. **Lower Inflation.** The ECB has a strong tradition of keeping inflation low. Joining the Euro will help reduce inflation expectations. 6. Incentive for greater competitiveness as can't rely on devaluation

Answer 102

1. Countries will **lose the ability to set interest rates.** 2. **Lack of exchange rate flexibility.** e.g. detoriation in competitiveness 2000-07 in EU countries 3. Low inflation may conflict with other objectives. 4. **Loss of independence over fiscal policy**. e.g. growth and stability pact limits government borrowing to no more than 3% of GDP. 5. **Bond Yields** in the Eurozone, there is no Central Bank willing to print money and act as lender of last resort

Answer 103

1.** Convergence of economic cycle**, to deal with common interest rate and monetary policy. 2. **Similar inflation** rates. If inflation is much higher, a country will become uncompetitive 3. **Mobility of labour and capital ** e.g. will unemployed workers find it easy to move to other areas in the monetary union? 4. Fiscal union. Similar levels of budget deficits and fiscal union to be able to offer help to depressed economies.

Answer 104

anchor currency, a currency that national governments and other instuitons are happy to hold as a key part of their foreign exchange reserves reserve currency of choice has been the US dollar

Answer 105

* An adjustable peg system is where currencies are fixed against another but the level at which they are fixed can be changed. o Crawling peg systems are a form of this but have a mechanism which allows the value to change.

Answer 106

* Central bank doesn't need to maintain a particular rate ot use reserves * Interest rates are reserved for domestic monetary policy * Partly able to auto-correct a trade deficit * Reduced risk of cuurrency speculation

Answer 107

For: * Avoids currency fluctuations --> encourage trade + investment * Reduces costs of currency hedging * Gives incentive to keep inflaiton low + helps if fixed to strong currency Against: * Govt has to intervene by rasising IR which has negative effects * Information failure; easy to set the wrong exchange rate, if too high wiill make goods uncompetitive + if too low it could cause inflation from high imports * Less flexibility to respond to temporary shocks * Cause current account imbalance * Dificult to keep at correct level; target of speculators

Answer 108

Soros made a £1 billion profit from Black Wednesday. The UK Treasury spent £27bn in buying sterling on the foreign exchange markets.

Answer 109

Uk exports to increase in value by 53% from 92-97

Answer 110

trade balance did not recover

Answer 111

Sheffield Political Economy research suggested that it was due to 'deep-rooted economic imbalances' and needs a rebalance towards maanufacturing and diversification of the export base 1) Much greater reliance on global supply chains so **higher import costs can offset impact ** 2) Impact of **protectionism** e.g. US tarifs of 11.2 billion on EU imports such as Land Rover 3) Demand for **imports are price inelastic while exports more price elastic**;UK is a net importer of Oil e.g. **2008 in dollar terms the oil price increased by 14% but in Sterling terms it rose by 42%** 4) Depressed economic growth in EU

Answer 112

when currency outflows **persistently exceed currency inflows** Normally needs capital flight too and a fall in the value of inflows

Answer 113

the number of months of imports the currency could finance

Answer 114

a nation does not have enough currency to pay for essential imports like medicine, foodstuffs, raw materials and replacement components for machinery; hamper sr economic growth e.g. Sri Lanka in 2020 ran out of fx reserves

Answer 115

1. **Relative export prices**. The relative cost of UK exports to other countries. 2. **Relative unit labour costs**. Unit labour costs are the cost of employing workers to produce one unit labour costs.

Answer 116

1. **Labour productivity** – (output per worker) 2. **Relative inflation rates**- experincing lower inflation means lower costs and prices 3. **Levels of infastructure**- if a country experiences transport bottlenecks, it will lead to higher costs and higher export prices e.g. Malwai/Zimbabwe through a single railway to Mozambique 4. **Cost of business**- levels of regulation and taxes reduce competition 5. **Exchange Rate** - undervalued exchange rate will make exports more competitive

Answer 117

1. **Education and training** - increase labour productivity 2. **Investment in Infastructure**- but susceptible to time lag +govt. failure 3. **Privatisation and Deregulation** - aim to increase efficiency 4. **Devaluation in Exchange** - but doesn't deal with issues of competitiveness 5. **Limiting Wage Growth** - reduces growth of unit labour costs 6. **Flexible Labour Markets** - help reduce labour costs

Answer 118

1. **Rising Exports** - lead to job creation + economic growth e.g. China rapid growth 2. **Improved CA** 3. **Low inflation**- competiitive exports lead to appreciation which helps with inflation 4. **Higher living standards** - with low import prices and higher export revenues 5. **Lower unemployment**

Answer 119

1. ** Appreciation in exchange rate could damage growth** and make exports less competitive 2. **Economy may become too reliant on exports**. and it will be more vulnerable to a downturn in the global economy.

Answer 120

* Variations in coporation tax rates * Low RULC * Non-wage costs such as regulation * Quality of infastructure * Avaliability of skilled labour * Ease of doing business * Macroecnomic stability

Answer 121

1. **Super-deduction tax relief** (130%) for encouraging small business investment 2. **Creation of Free Ports** 3. New UK Infastructure Bank- Bank of British Businesss

Answer 122

1. HS2 2. Thames Tideway Tunnel 3. Hinkley + Sizewell Point C 4. 400 million investment in Scottish Rail

Answer 123

1. Points-Based immigration system; allow a more competitive labour market for highly inelastic skilled labour markets 2. **5 billion Levelling Up Fund** 3. Agreed trade deals with **70 countries** plus the EU trade and cooperation agreement

Answer 124

* Big rise in NTBs which add costs * Employees struggling to hire workers, vacancies>UE. Uk migration has reached new levels * High budget deficit, rising tax burden * Loss of talent + R+D funding such as Erasmus funding * Real investment has stalled since referendum