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Economics Theme 4 > 4.1 International Economics - BoP > Flashcards

4.1 International Economics - BoP Flashcards

1
Q

Define balance of payments

A

It is the record of all internationaltransactions between countries comprising of the current, financial and capital account.

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2
Q

What is the ratio of UK’s import with EU against Non-EU countries

A

50/50

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3
Q

What is the split between the UK’s exports with EU and Non-EU countries?

A

45/55 (non-EU majority)

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4
Q

What are the top 5 countries the UK imports from

A

China (microchips)
Germany (cars)
USA (food/cars)
Netherlands (flowers/lightbulbs)
Norway (fish)

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5
Q

What are the top 5 countries that the UK exports to?

A

USA
Netherlands
Germany
Irish Republic
China

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6
Q

What are the 4 components that make up the current account?

A
  • trade balance in goods (visible)
  • trade balance in services (invisible)
  • net primary income from overseas
  • net secondary income
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7
Q

Give examples of the components of current account

A

Trade balance in goods - technology, raw materials
Trade balance in services - education (uni), cultural arts (sports), financial services
Net primary income from overseas - interest/profits from investments overseas, net remittances from migrant workers
Net secondary income - overseas aid/debt relief, military grants (2% to NATO), UK payment to EU

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8
Q

Give examples of capital account

A

Sales/transfer of patents, copyrights, franchises, leases and other transferable assets
- debt forgiveness (uni loans past a certain age, debt cancellation (aiding other countries)
- capital transfer of ownership of fixed assests

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9
Q

Give examples of financial account

A

Include transactions that result in the change of ownership of financial assets and liabilities:
- net balance of FDI
- net balance of portfolio of investments
- balance of banking flows (hot money)
- changes in value of reserves of gold and foreign currency

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10
Q

Why are gold reserves important?

A
  • gold holds value in case the currency breaks down
  • used to buy imports if there is not enough funds
  • counter economic shocks
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11
Q

Limitation of BoP

A
  • hard to quantify all services (trade balance in services)
  • informal economy
  • live data (latest is 2022 Q3)
  • impossible to reach equilibrium in reality
  • FDI hot money is volatile
  • time lag
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12
Q

Causes of the current account deficit

A
  • Increase globalisation (more competition so less X sold)
  • increasing protectionism (tariff on X)
  • UK has lack of natural resources
  • Brexit (economic shocks)
  • UK persistent C.A deficit due to weak supply side policies
  • expansionary fiscal policies + monetary policies
  • High value of £ relative to other economies
  • Economic cycle of trading partners
  • Relative inflation (pushes price of X)
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13
Q

Consequences of a C.A deficit

A
  • fall in growth
  • currency depreciation
  • may run out of gold and currency reserves
  • lack of competitiveness
  • weakness in supply side policies
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14
Q

List pros of current account deficit

A
  • Fall in inflation
  • sign that the economy is in a boom
  • improvement in standards of living
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15
Q

Cons of a C.A deficit

A
  • cyclical unemployment in X industry
  • Fall in gold and currency reserves
  • fall in international competitiveness
  • lead to increased uncertainty so lost in investors then capital flight
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16
Q

List policies to improve the C.A deficit

A
  • protectionism = subsidies for X, tariffs on M, quotas on M
  • expenditure switching policy (design to increase demand of X and decrease demand of M by depreciation/devaluation)
  • expenditure reduction policies (designed to reduce incomes via contractionary policies)
  • Improved supply side policies (improving quality and quantity of FoP)
17
Q

What does WTO stand for

A

World trading organisation

18
Q

Difference between devaluation and depreciation

A

Devaluation - occurs in fixed E.R system like China
Depreciation - occurs in free floating E.R system like UK

19
Q

Explain the evaluation of depreciation called the readjustment process

A

When value of £ decrease you’d expect X demand to increase and M demand to decrease
- However as X demand increases, demand for the currency increases, so currency begins to appreciate again resulting in the reverse effects.

20
Q

Explain the evaluation of the benefits of a depreciation referring to our trading partners

A

Depreciation is only beneficial when our currency becomes weaker than our top trading X partners’ currency like USA, China, Germany.

21
Q

What is UK current account deficit as of 24/01/2024

A

-5.2% of GDP

22
Q

What are you allowed to do for AP

A

Make examples up hypothetical such as,

For example, if the UK£ depreciates by 20% compared against the USD…

23
Q

What do you call an increase in the value of a currency in a fixed exchange rate system

A

Reevaluation

24
Q

What factors causes a rise in currency

A
  • speculative currency demand (trading)
  • increased FDI
  • Increased interest rates (FDI)
  • surplus in the current account (X>M)
25
Q

Evaluation of factors causing an increase in value of currency

A

State of the economy
Economic shocks
Readjustment process
Volatility
Macroeconomic stability

26
Q

Define a fixed exchange rate system

A

An economy whose currency’s value is pegged against another, and it controlled by the Government/Central bank

27
Q

Define a free floating exchange rate system

A

When a currency’s value is determined by the S/D and there is no Government/Central bank intervention

28
Q

How much productivity did the 4 day week study find out

A

20% increase

29
Q

How would you draw a diagram of quality or quantity of FoP improving

A

Classical LRAS diagram shifting outwards

30
Q

Define exchange rates

A

It is the value of a currency relative to a basket of currencies from other economies. Either under the free floating E.R or fixed E.R

31
Q

On a S/D graph, how would you draw a depreciation

A

Outward shift of supply
- excess supply due to speculation trader selling in fear of a recession where I.R would decrease

Inward shift of demand

32
Q

Advantages of Fixed E.R system?

A
  • makes international trade easier (stable currency for M and X)
  • no longer engage in forward markets
  • can control cost push inflation (when d of M is too high)
  • less influence by external factors
  • higher FDI
33
Q

Disadvantages of Fixed E.R system

A
  • loss of readjustment process (no longer automatic)
  • higher reserves needed (many countries do not have)
  • reduced sovereignty monetary policies (I.R)
  • creates political tensions e.g USA vs China caused global fall in GDP
  • may cause cost push inflation
  • devaluation may be against WTO rules
34
Q

Advantages of free floating system

A
  • when there is a C.A deficit the readjustment process is available
  • sovereignty to set monetary policies
  • reduces need of large reserves
  • less risk of currency being severely undervalued
  • acts as an insulation for the economy
35
Q

Disadvantage of Free floating E.R system

A
  • volatile due to speculation
  • a lower E.R may not correct a persistent deficit
  • conflict in macroeconomic objectives
36
Q

List some macroeconomic effects of a depreciation

A
  • rise in AD+RNO
  • improve C.A deficit
  • rise in cyclical unemployment (high costs of M)

Economics Theme 4 (6 decks)

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