4.1 - International economics Content Flashcards

Question 1

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4.1 - International economics

What is globalisation?

Answer

A

Growing interdependence of countries and the rapid rate of change in the world

Question 2

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4.1 - International economics

Define interdependence

Answer

A

The integration of local, regional, national economies into a single international market.

Question 3

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4.1 - International economics

How have economies integrated?

Answer

A

Free trade of goods and services
Free movement of FoP
Free exchange of tech + intellectual capital

Question 4

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4.1 - International economics

What are the 6 restrictions to globalisation? (PATS QE)

Answer

A

Protectionism
Administrative barriers
Tariffs
Subsidies to domestic industry
Quotas
Embargoes

Question 5

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4.1 - International economics

What does trade liberalisation mean?

Answer

A

Reduced protectionism

Question 6

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4.1 - International economics

What is a synonym for globalisation?

Answer

A

Free trade

Question 7

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4.1 - International economics

What are the impacts of globalisation on consumers?

Answer

A

↑ Choice - range of global products from global producers
↓ Prices - more competition and production is being switched from high cost to low cost locations
Loss of culture

Question 8

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4.1 - International economics

What are the impacts of globalisation for workers?

Answer

A

Job loss in non-comp. industries
Inc. employment in comp. industries
↑ Migration - Many migrants have moved for better economic opportunities and standard of living. Migration can fill skill gaps in the economy, raise productivity, reduce wage costs and increase competitiveness. But native workers might see migrants as lowering wage rates due to competition in the job market. Might strain the welfare state. Immobility of labour can be seen as market/government failure.
↓ Wages - have to compete on global scale - so unskilled wages go down as more supply. Skilled workers likely unaffected as less of them

Question 9

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4.1 - International economics

What are the impacts of globalisation on firms?

Answer

A

Specialisation & Interdependency: Firms become highly specialised and increasingly dependent on intricate global supply chains.
Cost Advantages & Market Expansion: Access to cheaper labour and materials reduces costs while opening new markets, leading to economies of scale and enhanced competition.
Footloose Capitalism: Firms strategically relocate production across borders to exploit comparative advantages and maximise profits.
Tax Avoidance: Companies engage in practices like transfer pricing and relocating headquarters to low-tax jurisdictions to minimise tax liabilities.

Question 10

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4.1 - International economics

How does an increase in globalisation affect eco growth?

Answer

A

Increases injections, FDI, increases Real GDP
(However could negatively effect environmnent)

Question 11

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4.1 - International economics

What are the diagrammatical effects of globalisation?

Answer

A

A reduction in price from P to P1
Increased overall Qd
(However, reduction in domestic Qs)

Question 12

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4.1 - International economics

What are the impacts of globalisation on firms?

Answer

A

Diversification of supply chains.
↘︎ Risk
Exploitation (divide labour market).
↗︎ Profits
Firms who unable to compete internationally will lose out.

Question 13

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4.1 - International economics

What are the characteristics of globalisation?

Answer

A

Increased trade of goods and services across national boundaries.
Increased movement of labour between countries. (migration)
Increased movement of capital between countries
Increased interchange of technology and intellectual capital
Increasing connectivity of people, communities and business through networks
Creation of global supply chains & new trade and investment routes in the world economy

Leads to greater specialisation and interdependence.

Question 14

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4.1 - International economics

What are the causes of globalisation

Answer

A

Advances in technology, IT, transport: Enable seamless global communication and remote work capabilities.
Trade liberalisation: Reduced protectionism through institutions like the WTO and policies from the Washington Consensus.
TNCs: Leverage economies of scale, produce in lower-cost countries, and establish global brands.
Improved transportation: Containerisation and large port infrastructure lower shipping costs and enhance global trade efficiency.

Question 15

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4.1 - International economics

What are the problems for Ireland cutting taxes so low to attract TNCs.

Answer

A

Other countries like France and Germany are not happy - Joseph Stiglitz accused Ireland of ‘Stealing revenues’
The United states cut corporate tax to 21% down from 35% to lure American countries back.
-> Game theory suggests that if all countries cut taxes, then everyone is left with lower tax revenues.
-> Countries are ‘footloose’ meaning that they might leave Ireland if tax incentives change
Distorts official statistics - makes growth appear higher than it actually is.

Question 16

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4.1 - International economics

What are the impacts of globalisation on governments?

Answer

A

Government now have to take a more ‘entreprenurial role’ in the economy, investing and intervening in order to improve a country’s international competitiveness.
- Lowering taxes, giving subsidies, spending on education and reserach.
Some governments forced to concede to the power of multinationals - Uber withdrew operations in Tanzania after government tried to regulate fares and cut comissions.

Question 17

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4.1 - International economics

What is the impact of globalisation on the environment?

Answer

A

Industrialisation and fossil fuel use have significantly increased greenhouse gas emissions, with a ~50% rise since 1990. Global temperatures could rise by 2.5ºC (UNEP estimates).
Multinationals exploit weak climate regulations, worsening environmental damage.
Rich nations invest in greener technologies, while deforestation (e.g., Brazil) persists.

Question 18

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4.1 - International economics

Discuss two macroeconomic policies, apart from protectionism, that a government could use to reduce the negative effects of globalisation. (12) (2018)

Answer

A

One way to tackle the ‘low wages’, ‘insecure employment and inequalities’ created by globalisation is by investing in education and training.
Investing will improve human capital and make workers more productive. This means that they can be more competitive against foreign competition and recieve higher wages. Less likely to be undercut.
This will help solve the ‘low wages’ and striking inequalities that have been created by globalisation.
Evaluation - Time lag. Education and training will take a long time, and might not be an option for many e.g. the elderly. Also conflicts with the government budget
Another way to tackle the ‘relative poverty’ and ‘striking inequalities’ created by globalisation is to introduce a more redistributive tax system.
Tax corporations and MNCs like Google, and give them to lower paid workers. This increases aggregate demand as lower paid workers have a migher MPC and reduces unemployment.
Higher wages and living standards therefore reduces the inequality and poverty created by globalisation.
Evaluation - Might be counterproductive because MNCs are ‘footlose’, it means that they will move to Ireland or Bermuda. This results in a net welfare loss

Question 19

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4.1 - International economics

Why do improvements in technology mean globalisation?

Answer

A

Easier to transport goods/services/capital across national boundaries - countries can focus on producing and exporting goods - increased specialisation and interdependence.
Technology means that capital can move across the world
People can work remotely.
Rapid share of information.

Question 20

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4.1 - International economics

What has caused deglobalisation?

Answer

A

Protectionism: Governments might implement protectionist measures such as tariffs, quotas, and trade barriers to shield domestic industries from foreign competition.
Economic Shocks: Economic downturns or recessions can lead countries to focus more on domestic priorities and reduce their reliance on global trade and investment.
Changing Trade Agreements: Countries might renegotiate or withdraw from trade agreements that were previously promoting globalization.
Environmental Concerns: Growing concerns about climate change and environmental sustainability might lead to policies that prioritize local production and reduce the carbon footprint associated with long-distance trade.
Health Crises: Global health crises, such as pandemics disrupt travel, trade, and supply chains.

Question 21

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4.1 - International economics

What are the drawbacks of globalisation

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Brain drain: Skilled workers migrate from LEDCs, reducing human capital in their home countries.
Exploitation of cheap labour: Workers in LEDCs often face poor wages and working conditions.
Increased unemployment: Domestic industries struggle due to competition from imports.
Increased inequality: Widening relative poverty within developed economies as globalisation benefits are unevenly distributed.
Environmental damage: Industrialisation and resource overuse harm ecosystems.

Question 22

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What are the benefits of Globalisation
[5]

Answer

A

Cheaper goods and services for consumers
More competition in consumer markets - incentivises innovation and cost cutting where possible
Reduction in absolute poverty rates
Gains from specialization of factors of production
Gains from improved labor mobility - helping to relieve skilled labor shortages and promoting the sharing of ideas from a more diverse workforce which can then promote innovation.

Question 23

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4.1 - International economics

Why is tax avoidance bad?

Answer

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Means that resources can be exploited
Bad for the government budget balance.
Welfare loss - Western conglomerates siphon off profits to tax havens, whilst developing countries are unable to fund infrastructure, education. Keeps people in poverty.
Erosion of sovereignty e.g. Uber suspended operations in Tanzania after they tried to regulate fairs

Question 24

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4.1 - International economics

How can the government reduce the negative impacts of globalisation?

Question 25

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4.1 - International economics

Disadvantages of globalisation for high income countries

Answer

A

Job Displacement: Operations moving to low-wage countries or rising competition may leave workers unemployed.
Income Inequality: Globalisation increases wage gaps between high-skilled and low-skilled workers; the top 1% has seen income share rise by over 3% since the 1980s (IMF).
Environmental Degradation: Long-distance transportation and resource exploitation drive carbon emissions and pollution.

Question 26

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4.1 - Inernational economics

Disadvantages of globalisation for developing nations

Answer

A

Economic Dependence: One disadvantage of globalization is that developing nations can become overly dependent on the export of a few key commodities or industries, leaving them vulnerable to fluctuations in global demand and prices.
Exploitation of Labour: As multinational corporations seek to lower costs, they may outsource production to countries with lower labour standards, wages, and working conditions.
Environmental Degradation: As companies seek out the cheapest sources of raw materials and production, they may exploit natural resources and pollute local environments. This threatens the sustainable growth of many poorer countries

Question 27

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4.1 - International economics

Advantages of globalisation for high income countries

Answer

A

Increased access to foreign markets: Globalization has allowed the UK to expand its markets beyond its national borders. For instance, the value of UK exports increased from £196 billion in 2000 to £613 billion in 2019.
Attraction of foreign investment: FDI in the UK increased from £62 billion in 2000 to £1,033 billion in 2019, reflecting the country’s ability to attract and benefit from international investment. This has an impact on AS and long run aggregate supply.
Improved productivity and innovation: A Study by the National Bureau of Economic Research found that exposure to international competition has driven innovation in UK firms, leading to increased factor productivity and competitiveness.

Question 28

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4.1 - International economics

Advantages of globalisation for developing nations

Answer

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Increased foreign investment: An increase in foreign investment in developing countries, providing a source of capital, technology, and expertise. FDI inflows to Sub-Saharan Africa increased from $10 bn in 2000 to $46 bn in 2020.
Expanded access to global markets: According to the World Bank, the value of exports of goods and services from Sub-Saharan Africa increased from $79 billion in 2000 to $338 billion in 2019, reflecting the growth in global trade.
Increased access to technology and knowledge: Access to new technologies and knowledge from around the world can drive economic growth and development. Cell phone penetration in Sub-Saharan Africa increased from 3% in 2000 to 44% in 2020, reflecting the growth in technology adoption in the region.

Question 29

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4.1 - International economics

When does comparative advantage occur?

Answer

A

When one country can produce a good / service at a lower OC cost than another country.

Question 30

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4.1 - International economics

What does absolute advantage mean?

Answer

A

When an economy can produce a greater total of goods for the same quantity of inputs.

Question 31

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4.1 - International economics

What does the theory of reciprocal comparative advantage state?

Answer

A

This occurs when two countries have absolute advantage in different products.
Countries should specialise in their advantage and import the good they don’t have advantage in.

Question 32

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4.1 - International economics

When does reciprocal comparative advantage occur?

Answer

A

When two countries, with absolute advantages in different products trade with each other

Question 33

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4.1 - International economics

What is an evaluation to theory of reciprocal comparative advantage?

Answer

A

Theory of comparative advantage - even if a country has absolute advantage in all goods, trade can still benefit if there is a difference in the OC

Question 34

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4.1 - International economics

How can a resource-poor country with no absolute advantages gain from trade?

Answer

A

As long as a country has a comparative advantage in some resource (as long as it faces a lower opportunity cost than another country for that resource), then it can benefit from trade.

Question 35

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4.1 - International economics

Advantages of Specialization and Trade in an International Context

Answer

A

Efficiency and Productivity: Specialization allows countries to focus on producing what they are most efficient at, leading to increased productivity and economic growth.
Consumer Benefits: International trade provides consumers with a wider variety of goods and services at competitive prices, improving their standard of living.
Resource Allocation: It enables efficient resource allocation as countries can allocate resources to industries where they have a comparative advantage, reducing wastage.
Economies of Scale: Specialization often leads to larger production scales, which can result in economies of scale, further reducing production costs.
International Cooperation: Trade fosters peaceful international relations and cooperation as countries become interdependent.
Theory of comparative advantage states countries should specialise in goods with the lowest OC - (This will boost economy + lead to greater output globally).

Question 36

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4.1 - International economics

What are the disadvantages of specialisation to trade?

Answer

A

Countries could become over-dependent. (if one export fails, collapse. e.g. Manchester, shipbuilding). Dutch disease.
High interdependence - trade prevented e.g. wars = massive problems.
Job Displacement: Specialization can lead to job displacement in industries where a country does not have a comparative advantage, causing unemployment and social issues.
Dependency: Over-reliance on imports for critical goods can make a country vulnerable to supply disruptions or price fluctuations.
Income Inequality: While trade can benefit a nation as a whole, it may exacerbate income inequality if the gains are not equitably distributed.
Environmental Concerns: Specialization in resource-intensive industries may lead to environmental degradation if not regulated properly.
Trade Imbalances: Persistent trade deficits can lead to indebtedness and economic instability for some countries.
Loss of Domestic Control: Relying on imports for essential goods can compromise a nation’s control over its own economy and security.

Question 37

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4.1 - International economics

Give an example of a country that lost comparative advantage and its consequences:

Answer

A

Italy lost comparative advantage for manufacturing, forced to move from a secondary to a tertiary economy.

Question 38

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4.1 - International economics

Evidence how trade liberalisation can lead to eco development:

Answer

A

Efficient use of resources for comparative advantage.
Export-led growth. e.g. Singapore and South Korea.

Question 39

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4.1 - International economics

Give a diagram for the theory of comparative advantage:

Answer

A

Even though USA has an absolute adv. in both machines + food, OC of the two countries are different.
Theory of comparative adv. states countries should specialise where they have the lowest OC.
USA - machines, G. - food.

Question 40

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4.1 - International economics

Why do countries still trade even if one country has an absolute advantage?

Answer

A

Because they may still be able to produce a good at a lower relative opportunity cost.
This means that both countries can focus on what they have a lower opportunity cost in and increase total output.

Question 41

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4.1 - International economics

How could the negative impacts of primary product dependence be evaluated? Why might primary product dependence not be so bad?

Answer

A

LEDCs may have a comparative advantage in primary products - Therefore should continue to develop in areas which they are strongest - Argument given by the Bad Samaritans
Some rich countries have been able to use primary products to develop - Saudi Arabia and oil. - Primary product revenue should be used to reinvest into manufacturing.
Forward markets can be used to fix prices in advanced to reduce volatility and risk.
Not all primary products have a low YED - Diamonds in Botswana.
Primary products rose steeply in price between 2000-2008 while prices for manufactured goods was falling. They also rose post-pandemic.

Question 42

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4.1 - International economics

What are the assumptions of the theory of comparative advantage

Answer

A

Ignores transport costs - Might eliminate comparative cost advantage.
Ignores economies of scale.
Assumes there are only two economies producing two goods.
Assumes that traded goods are homogenous.
Assumes perfect factor mobility.
Assumes no trade barriers
Assumes perfect information

Question 43

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4.1 - International economics

What are the limitations of comparative advantage? List them.

Answer

A

Transport costs are not considered
Strategic industries - risky to be reliant on another country
Not just 2 countries in the world producing goods
Infant industries might be damaged

Question 44

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4.1 - International economics

What are the 4 factors influencing the pattern of trade?

Answer

A

Trading Blocs - within blocs members have reduced trade barriers so more trade between them
Exchange rate - changes in exchange rate mean changes in competitiveness of exports and amount of imports, SPICED/WIDEC
Emerging economies - they are major exporters of manufactured goods and services, altering global trade dynamics
Comparative advantage - countries exports g/s that they have comparative advantage in and import those they have a disadvantage in. This drives international trade patterns

(TEEC)
Also
* Tarrif and non tarrif barriers, FDI, changes in competitiveness and inflation rates.

Question 45

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4.1 - International economics

What is trade diversion?

Answer

A

When the patterns of trade are changed, due to blocs.
(Reduced benefits from specialisation).

Question 46

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4.1 - International economics

How has the UK pattern of trade chanaged in the past 60 years?

Answer

A

UK has increasingly hada comparative advantage in services rather than good.
-> Usually financial services.
Foreign trade has increased as a proportion of GDP. Exports are now around 30% of national income.
The UK does earn money from North Sea Oil.
EU has become main trading partner since joining the EEC

Question 47

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4.1 - International economics

What does terms of trade measure?

Answer

A

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

Question 48

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4.1 - International economics

What does ToT tell us in terms of the quantity of imports and exports?

Answer

A

The quantity of exports that need to be sold to buy a given quantity of imports.

Question 49

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4.1 - International economics

Give the equation for terms of trade:

Answer

A

Avg export prices index / Avg import prices index x 100.
(Remember X over M).

Question 50

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4.1 - International economics

What Terms of Trade (ToT) does the UK aim for?

Answer

A

Increasing, increased injections into economy.

Question 51

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4.1 - International economics

How do we know how X and M prices affect ToT?

Answer

A

Use equation ToT = avg.Xprices/ avg.M prices.
If X prices ↑, ToT ↑.
If M prices ↓, ToT ↑.

Question 52

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4.1 - International economics

What affects ToT in the SR / LR?

Answer

A

SR - anything that affects price
LR - anything that affects productivity

Question 53

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4.1 - International economics

What is the Prebisch-singer hypothesis?

Answer

A

In the LR, the price of primary products declines compared to manufactured products.

(Terms of trade for primary products tends to fall in the LR).

Question 54

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4.1 - International economics

Give an example of the Prebisch-Singer hypothesis:

Answer

A

Profit margins for chocolate are better than cocoa.

Question 55

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4.1 - International economics

What is a synonym to ‘Dutch disease’?

Answer

A

Primary product dependency.

Question 56

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4.1 - International economics

When does Dutch disease occur?

Answer

A

When rapid development of one sector of the economy precipitates a decline in other (non-resources) sectors.
(Other industries don’t take off, Rostow’s model doesn’t occur).

Question 57

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4.1 - International economics

What are the factors influencing the terms of trade?

Answer

A

A change in exchange rate. spiced/widec
Inflation
A change in demand for imports and exports
Changing incomes affect pattens of demand.
Changes in productivity
Incomes
PRIMARY PRODUCT DEPEDENCY
Protectionism - tarrifs increase prices so terms of trade worsen

Question 58

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4.1 - International economics

What two things would cause an improvement in the terms of trade?

Answer

A

Falling import prices
Rising export prices

Question 59

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4.1 - International economics

Give examples of what would cause an improvement in the terms of trade.

Answer

A

Inflation - would increase export prices.
Tarrifs - would increase import prices.
An appreciation in the exchange rate

Question 60

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4.1 - International economics

Give examples of what would cause a deterioration in the terms of trade?

Answer

A

Higher productivity
A weaker exchange rate

Question 61

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4.1 - International economics

Assume that demand for imports and exports are price inelastic. There is an improvement in the terms of trade. What would happen to:

Import expenditure
Export revenue
Affect on the overall economy?

Answer

A

Would lead to a reduction in import expenditure
A rise in export revenue
Increase in net trade and an improvement in the balance of payments.

Question 62

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4.1 - International economics

When is an improvement in the terms of trade a good thing?

Answer

A

If imports are price inelastic - consumers are not responsive to the fall in price so spend less on imports
And exports are price inelastic - other countries continue to buy exports despite the increase in price.

Question 63

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4.1 - International economics

When would an improvement in the terms of trade be a bad thing?

Answer

A

If demand for imports imports are elastic
And demand for exports are price elastic

Question 64

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4.1 - International economics

Assume that demand for imports and exports are price inelastic. There is an deterioration in the terms of trade. What would happen to

Import expenditure
Export revenue
Affect on the overall economy?

Answer

A

Increase in import expenditure
Decrease in export revenue
Bad for current account balance

Answer 64

A

Fall in import spending
Increased export revenue
There is an improvement on the current accounta balance of payments

Answer 65

A

Likely will be bad for the current account - commidities are very price inelastic.
This would mean as prices fall, export revenues will also fall
This means a deterioration in trade balances and cut in aggregate demand.
Evaluation- Commodities are very volatile. Likely future increase. Longrun/short run.
Or, depends on what is happening with imports.

Answer 66

A

For every import, a country has to export more
A decline in terms of trade reduces the ability to import goods.
Less purchasing power means worse standards of living
Can make it harder to pay foreign debt.

Answer 67

A

Might make exports more competitive - better for balance of payments.
The impact of a decline in the terms of trade will depend on the elasticity of demand. If demand is elastic, the lower price of exports will cause a bigger % increase in demand.
Some LDC’s have seen an improvement in terms of trade because of rising price of commodities and food post-2008. It is not always LDCs who see a decline in the terms of trade.
It is important to distinguish between a short-term decline in terms of trade and a long-term decline. A long-term decline is more serious for reflecting a fall in living standards.

Answer 68

A

A group of countries with trade agreements.

Answer 69

A

Regional Trading Bloc.
Free Trade Area
Preferential Trade Area
Customs union.
Common / single markets.
Monetary unions.
Economic union.

Answer 70

A

A group of countries in a geographical region that protect themselves from imports from non-members.
(Also reduction / elimination of internal tariffs).

Answer 71

A

Trans-Pacific Partnership (TPP)

Answer 72

A

Trade creation - Makes it easier for countries to trade within the bloc and specialise - Exploit comparative advantage. Economies of scale from new markets. Greater competition
More FDI - MNCs can invest in the free trade area as they can avoid tariffs and other trade restrictions.

Answer 73

A

Trade diversion - Trade is diverted away from former partners - when the UK joined the EU it began trading less with the commonwealth. might lead to overall fall in economic output.
Country might be better off outside - they can sign lots of bi-lateral agreements
Might make developing countries worse off - Do not have enough economies of scale so their infant industries die off.
Less efficient use of world resources - Trading blocs distort comparative advantage because they entain the use of trade restrctions - Might be more effective to persue global free trade in the WTO.
Increased negative externalities of production, resource depletion & environmental damage

Answer 74

A

Reduced tariff barriers on all goods coming from other members.
(Members allowed to impose restrictions on those outside the FTA)

Answer 75

A

Reduced barriers on some goods
(Used to protect domestic industries)

Answer 76

A

The removal of tariff barriers between members and acceptance of common external tariff against non-members.
May also have preferential import tariffs rates that apply to trade agreements with the customs union has entered into with other countries or groupings of countries

Answer 77

A

No barriers to trade between members - freedom of asset / factor mobility.
Common external tariffs on imported goods from outside.

Answer 78

A

Harmonisation of macroeconomic policies e.g. common rules regarding monopoly powers, anti-competitive practices and the removal of custom posts.
(Best example is the EU).

Answer 79

A

No customs posts between countries - Just as goods and people are free to travel between Manchester and London, they should be as free to travel between London and Milan
Identical product standards - The existence of individual national safety standards on cars, for instance, is a barrier to trade just as it would be if cars sold in London had to meet different safety regulations as cars in Bristol
Harmonisation of taxes- If the tax on the same car is £2000 more in the UK than in France, then UK residents will buy their cars in France and drive them over -> distorting pattern of trade
A common currency - Having to buy foreign currency is a barrier to trade, hence there should be a common currency as there is in the UK

Answer 80

A

Import-tariffs free access to a single market of nearly 500 million people - Opportunity to exploit economies of scale – leading lower long run unit costs and higher profits
Easier access to foreign direct investment - Inward FDI can lift trend rates of economic growth and raise factor productivity
Access to EU structural funds - Investment helps improve infrastructure and potential output (long run aggregate supply
Better access to EU capital markets - Eu companies can more easily raise extra investment funds from bond and capital markets
Discipline of intense competition from being inside the EU single market - Businesses must become more cost efficient + improve their dynamic efficiency to remain competitive

Answer 81

A

‘lack of control’ over immigration
Fairness/equity of subsidies + grants
Competition -> loss of domestic jobs
Profits/wealth in capital markets

Answer 82

A

Countries with a single currency and exchange rates monitored by a central bank.

Answer 83

A

EU - Eurozone.
(Results in loss of monetary policy for members).

Answer 84

A

Trade creation - Specialise, Comparative Advantage.
Savings on transaction costs - No need to convert currencies.
Greater certainty for firms - Fluctuations are less likely. Increases business confidence. Firms do not have to worry about unfavourable currency fluctuations. For example, after the mini budget the £ fell to almost parity with the dollar.
Increased economies of scale - New markets are unlocked, firms can expand and reduce costs.
Price stability
Currency risk – Euro is more stable than smaller currencies. Reduced currency risk makes is easier for smaller countries to borrow money
Trade – Euro enhances the gains from being in the single market – e.g. it encourages more cross border trade in goods and services
Investment – Membership of Euro is likely to stimulate inward investment e.g. in industries such as tourism, financial services, car-making
Competition – Euro increases price transparency and market competition which then helps consumers to find products at better prices

Answer 85

A

Loss of control over monetary policy - countries can’t use monetary policy in order to adopt to local problems. One sized fits all.
Loss of exchange rate flexibility
Reduced control over fiscal policy - 3 % limit on budget deficit and 60% limit on national debt or face a fine
Transition costs - Adjustment costs when switching currencies
Makes countries excessively interdependent - Contagion.

Answer 86

A

Similar trade cycles - So that interest rates synergise. E.g. interest rate rises to curb inflation in a booming Germany will not help Spain if it is in recession.
Mobility of factors of production - Reduces the impact of shocks, as worker can migrate to other countries.
Mobility of finance - There should be complete mobility of finance with prices & wages free to adjust based on market conditions.
Automatic fiscal transfers - Some form of automatic fiscal transfer is needed for countries that are doing badly. E.g. Greece and Portugal. This will reudce the need of excahnge rate adjustment, which might have ben the prior policy response.
Similar economic situation – so interest rate changes have similar effects across the union

Answer 87

A

To help members use trade to raise living standards and create jobs.

Answer 88

A

Tries to negotiate trade agreements and resolve trade problems.
(By reducing protectionism + ↑ integration).

Answer 89

A

Allows rich countries to exploit developing countries, paying low wages and making them work in conditions that would be completely unacceptable in the developed world - Glencore in Zambia, DRC
Is causing environmental disaster as rich countries plunder the poor countries
Destroys native cultures and replaces it with an American way of life.
Forces poor countries to lower their barriers to trade whilst rich countries keep theirs
Gives ownership of the rules of the world trading system to a few rich countries and their multinational companies

Answer 90

A

If the WTO cannot produce multilateral agreements between all member countries then countries will resort to signing ever more regional trade agreements (RTAs)
RTAs do not produce anywhere near the economic gains that could be achieved by a world trade agreement
Still arguably better than nothing so long as trade creation > trade diversion

Answer 91

A

Conductor – come up with a set of rules that apply to international trade. They also bring countries together at conferences & encourages them to reduce or eliminate protectionist trade barriers between themselves e.g. The Doha Round conferences
Tribunal role – Settling disputes between members, countries are encouraged to work it out between themselves but sometimes they don’t. Member countries can file a complaint if they believe a trading partner has violated a trade agreement. The WTO will then run a hearing & make a judgement
Monitor roles – The WTO reviews the trade policies of its members to make sure that WTO rules are being applied fairly and consistently
Training role - The WTO provides training to government official in (mostly) developing countries, to help them engage in trade with other WTO members.

Answer 92

A

Taxes placed on imports.

Answer 93

A

X and Y represent net welfare loss.
Yellow box represents govt. rev.

Answer 94

A

Welfare loss is greater with quotas, as there is no tax revenue generated by the govt

Answer 95

A

Qs of domestic producers increases from Q1 to Q4.
Qs of world producers decreases from Q2 to Q3.

Answer 96

A

Increases prices, due to reduced world supply. Reduces QoL for consumers.
However, govt. revenue from tax may improve QoL in LR (hypothecated).
Other eval: Infant industry argument: domestic producers increase producer surplus + increased market share increased job protection in domestic economy.

Answer 97

A

Triangles X and Y = net welfare loss.
(Net welfare loss as areas of X and Y larger than revenue).
Reduction in CS larger than increase in PS.

Answer 98

A

Potential distortion of comparative adv. - as this theory assumes no tariffs.
Tariff alters the cost advantage that countries may have built up through specialisation.
(Another downside is retaliation - need a para to memorise for this one).

Answer 99

A

When importing country represents a very small proportion of the total demand for the good.
∴ Any protectionist diagram can be evaluated by elasticity of world supply i.e the optimal tariff argument.

Answer 100

A

A country with a large proportion of global trade experiences a smaller price increase when tariffs are imposed.
Reducing the MSC all while govt. benefits from tax rev.

Answer 101

A

The country with a large proportion of global demand reduces global price (as they import less).
The usual price increase of a tariff is offset by this fall in global prices.

Answer 102

A

Not much increase in domestic price (as share of global demand is sufficiently large for protectionist country).
Tax revenue for govt. equal to the value previously earned by foreign producers (before the fall in world prices).

Answer 103

A

Horizontal, perfectly elastic.

Answer 104

A

Optimal tariff theory:
Tariff can actually increase a countries welfare, if the area of tax revenue is larger than the loss in consumer surplus.
(Condition is country must represent large proportion of global demand).

Answer 105

A

Size of tariff x no. of imports.

Answer 106

A

Retaliation.
(Countries will retaliate with tariffs that cause domestic country to overcome their portion of DWL).

Answer 107

A

An additional tariff, above normal import tariffs.

Answer 108

A

A ‘tit for tat’ trade war.

Answer 109

A

However, there is net welfare loss overall, represented by blue boxes.

Answer 110

A

Infant industries - 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
Sunset industries - At the end of the life cycle, these firms are on their way out & the government chooses to support them to help limit the economic damage that would occur if they closed abruptly
Strategic industries - Industries such as energy, defense & agriculture are essential to self-sufficiency & security. Being reliant on other countries for these creates vulnerabilities for a nation
Dumping - Dumping is anti-competitive & can harm a country’s industries. Excess output is sold in another country below costs (illegal) or below normal prices in the home market
Employment - helps fix structural unemployment and offshoring
Current Account deficit - When imports > exports the amount of money leaving the country to support foreign firms is greater than that entering to support domestic firms. Protectionism aims to correct this imbalance
Raise tax revenues to lower budget deficit - Important for countries that are developing as they have a limited domestic tax base

Answer 111

A

Outward shift in domestic supply to Q3. Higher prices due to relative shortage.

Answer 112

A

They create a relative shortage, total output falls:

Answer 113

A

Before the tariff domestic producers produced output equal to Q1 & their revenue was equal to Pw x Q1
After the tariff was imposed domestic producers produced Q3 & their revenue was equal to Pw X Q3
Domestic producer surplus has increased by area 2
Over-reliance on protectionist policies can lead to ineffieinces

Answer 114

A

Before the tariff domestic consumers consumed Q2 products at a price of Pw
After the tariff domestic consumers consumed fewer products (Q4) at a higher price of Pw+tariff
Domestic consumer surplus has decreased by areas 1, 2, 3 & 4
Domestic industries become more competitive and so may get better products

Answer 115

A

After the tariff is imposed the government receives tax revenue equal to ((Pw+tariff) - Pw) x (Q4-Q3) - area 3
Protectionist policies may strain diplomatic relations and lead to retaliation by trading partners.

Answer 116

A

The standards of living for consumers worsen as the value of their income is eroded as they are paying higher prices
Domestic firms who benefit from increased production may increase employees’ wages
——-> This would increase the standard of living for employees

Answer 117

A

Workers in industries that have been experiencing structural unemployment due to foreign competition will feel that the tariff results in them being treated more fairly
Protectionism can exacerbate income inequality if it benefits specific industries or groups while imposing costs on others.
It may also affect global income distribution by limiting opportunities for developing countries to export.

Answer 118

A

Absolute quota – A simple physical limit either a volume or a value
Tariff rate quota – These allow a certain number of imports to gain a discount on the usual tariff rate
Voluntary export restraints (VER) – This is when a government limits the amount of exports from one country to another for a particular type of good.

Answer 119

A

Quotas tend to cause a bigger fall in economic welfare because the government don’t gain any tax revenue, that you get with tariffs.
Quotas allow the country to be certain on the number of imports coming in. Tariffs is more unknown because it depends on the elasticity of demand and how consumers and suppliers react to the tariff. Tariffs depend on the market
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. Some export firms may do well if they get the quota allowance, but others may lose out. It becomes a political issue on how to distribute the quotas. Firms may also dislike the uncertainty of not knowing how many quotes to gain. Could be more corruption with quotas, so puts politicians are put under pressure.

Answer 120

A

Payments to domestic producers which lower their costs.

Answer 121

A

Decreases costs of production
- Increases output
- Increases international competitiveness
Higher revenues will lift profits and possible lead to higher share price. More output could lead to economies of scale

Evaluation:
Risk of dependency, removes the incentive to be more competitive by innovation, increasing efficiency and productivity

Answer 122

A

The subsidy may not be large enough to change the world price. So won’t affect them
But could lower the overall price

Eval
Facing higher taxes if the subsidy is expensive

Answer 123

A

Can be an effective non-tariff barrier to reduce the volume of imports by encouraging domestic production

Eval:
Doesn’t generate tax revenue. More spending can increase budget deficit. Opportunity cost

Answer 124

A

Risk of Retaliation and a possible trade war
Market Distortions
Higher prices for consumers
Regressive effect on income inequality
Incentives to by-pass controls in shadow markets
Higher costs for exporters

Answer 125

A

Increases their output
Raises the selling price
Increases their revenue

Answer 126

A

Decreases their output
* Compared to a tariff, those firms who manage to export in the quota receive a higher price for their sales

Answer 127

A

Results in higher prices & less choice

Answer 128

A

They do not receive any tariff revenue (as there is no tariff)
- They may receive higher tax revenue at the end of the financial year when domestic firms pay their corporation tax.
- More employment so more taxes that way and also achieve some objective of low unemployment

Answer 129

A

Reduces for consumers as higher prices erode the purchasing power of their income

Answer 130

A

Improves for domestic firms but worsens for foreign firms

Answer 131

A

Makes it harder for them to compete with domestic firms

Answer 132

A

Improves for consumers as they benefit from lower prices - their income goes further

Answer 133

A

Domestic firms can compete more equally

Answer 134

A

Limits foreign competition
- Protects levels of outputs
- May increase selling price & revenue

Answer 135

A

Acts as a disincentive to sell into foreign markets
* Costs of meeting the non-tariff barriers may significantly reduce profit margins

Answer 136

A

May reduce choice/variety in a market

Answer 137

A

They may lose some credibility with the WTO
- Enforcing the non-tariff barriers may be difficult or expensive

Answer 138

A

Less choice & higher prices erode standards of living
- Product labelling information may improve decision making & quality of life

Answer 139

A

May help improve equality e.g. environmental standards help create equal production inputs which results in equality in the costs of production

Answer 140

A

The sum total of a country’s income and expenditure on foreign trade
together with all its international capital movements

It’s split into two sections…..

Current account
Capital & financial account
Always = 0

Answer 141

A

(Balance of) trade in goods
(Balance of) trade in services
(Net) income flows from abroad
(Net international) transfer payments.

Answer 142

A

How much is spent on imports vs the total value of exports

Answer 143

A

X = Positive
M = Negative

Answer 144

A

Current account
Financial account
Capital account
Balancing items

Answer 145

A

Ensures BoP is always 0.
S for currency = D for currency.
(E.g. CA deficit can be compensated for by FA surplus).

Answer 146

A

Rate of consumer spending on imports AKA Marginal propensity to import. (↑M ↓BoP).
International competitiveness.
Structure of the economy. (De-industrialisation can harm export sector; e.g. Italy).
Exchange rate. (Can influence export value).

Answer 147

A

Relatively low productivity
Relatively high value of a countrys currency
Relatively high rate of inflation
Rapid economic growth resulting in increased imports
Non-price factors such as poor quality and design
Poor Price
Recession
Volatile global prices
Government policy

Answer 148

A

Low productivity raises costs
Exporting firms with low productivity may find themselves at a price and cost disadvantage in overseas markets which will decrease competitiveness and the level of exports
With higher domestic prices, consumers may also buy abroad thus increasing the imports
Falling exports and rising imports creates a deficit

Answer 149

A

Currency appreciation makes a country’s exports more expensive relative to other nations
Foreign buyers look for substitute products which are priced lower
Exports fall and the balance on the current account worsens
Similarly, currency appreciation makes imports cheaper
Domestic consumers may switch demand to foreign goods and as imports rise, the balance on the current account worsens

Answer 150

A

A relatively high rate of inflation makes a country’s exports more expensive than other nations
Foreign buyers look for substitute products which are priced lower
Exports fall and the balance on the current account worsens
Similarly, high inflation may mean that goods/services are cheaper in other countries
Domestic consumers may switch demand to foreign goods and as imports rise, the balance on the current account worsens

Answer 151

A

Rapid economic growth raises household income
Households respond by purchasing goods/services with a high-income elasticity of demand (income elastic)
Many of these goods are imported and as imports rise, the balance on the current account worsens

Answer 152

A

When a country develops a reputation for poor quality and design, its exports fall as foreign buyers look for better substitutes elsewhere
Domestic buyers who are able to shop abroad also choose to buy better quality products elsewhere and the level of imports rise
A fall in exports and a rise in imports worsens the balance on the current account

Answer 153

A

Signals a long term loss of competitiveness
May mean higher unemployement
- Withdrawl from circular flow, drag on aggregate demand
May create imported inflation
- Leads to a falling exchange rate - higher import costs.
Fall in GDP
- Withdrawl from circular flow

Answer 154

A

Depends on the size of the deficit and how long it persists
* Might be cyclical
Depends on what the imports are - capital goods and investment will improve future growth prospects.
Depends on if the exchange rate is fixed or floating, In a floating system, the balance of payments deficit should be self correcting
Might be financed by a surplus on the financial account

Answer 155

A

Competitive economy - High productivity, investment, training, quality
Low inflation
Low exchange rate
Vast natural resource - Kuwait, UAE
Trade cycle
Government policies - competitive supply side policies
Surplus of savings over investment

Answer 156

A

Retaliation - Countries with large deficits might retaliate by putting up barriers to trade to reduce imports - American withdrawl from NAFTA
Resources are focused on producing to meet export demand rather than export demand, so lower consumer living standards
Rise in the exchange rate - makes exports more uncompetitive in the long run.
Inflation - high demand for exports could create inflation.

Answer 157

A

Do nothing and leave it to market foces in Forex market to self-correct deficit
Use expenditure switching policies - change relative prices of exports and imports
Use expenditure reducing policies - lower real incomes and AD - cutting demand for improts but causes unemployment
Use supply-side policies

Answer 158

A

This is because it has to pay for everything it consumes and funds in some way - to fund a current account deficit, a country must be selling assets to foreign investors.
It is debatable whether this is sutainable in the long run since, if people invest in a country, at some point they will require a return on their investment, and this will cause a deficit on the financial account

Answer 159

A

Depreciation of the exchange rate - Reduces relative price of exportds & make imports more expensiive - BUT risk of cost push inflation - which erodes competitive boost + fall in incomes
Import tariffs - Increases the price of imports & makes domestic output more price competitive - BUT risk of retaliation from other countries if import tariffs are used as BoP policy
Low rate of inlfation (perhaps deflation) - Keeps general price level under control and makes exports more competitive - BUT risks from deflation as a way of achieviing intenal develuation - including lower investment

Answer 160

A

Increase in income taxes - Reduces real disposable incomes causing falling demand for imports - BUT cut in living standards and risk of damage to work incentives in labour markets
Cuts in real levels of government spending - Lower aggreagate demand, firms may look to export their spare capacity - BUT damage to short term economic growth, risks that austerity hits investment

Answer 161

A

Means finaince from abroad (in form of loans or foreign direct investment) is required in order to fund continued imports

This may mean that a country is gradually selling its assets
Owing money to a foreign entity creates vulnerabilites
* 2008 GFC - Greece owend creditors significant sums and was required to pay these back making numerous problems their economy. Creditors insisting on being paid back quickly
Run up large external debts and then relying on foreign capital
May switch towards protectionist policies
Can lead to fall in relative living standards if economoc growth slows down

Answer 162

A

Focus of allocation of resources is on meeting foreign demand as opposed to meeting domestic demand

This can limit availabilty of goods/services in the local economy which can possibly decrease the standard of living for some households
It can also create instabiloty in the forex maket if there is a floating exchange rate
Saving more than they spedn
May adopt a policy of delibrately under-valuing the currency
May be under-consuming (affecting living conditions)

Answer 163

A

major issue with trade imbalances is that it strengthens those who want to move away from free trade. Large trade imbalances leading to rise of de-globalisation – creating trade tensions –> tariff and non-tariff barriers

Answer 164

A

A net improvement in trade will only occur if (PED X + PED M) is more than 1.
(Good evaluation to the J-Curve).

Answer 165

A

Short term negative effect (of devaluation as demand inelastic).
Long term positive effect (of devaluation as demand becomes more price elastic).
REGARDING THE CURRENT ACCOUNT.

Answer 166

A

In the short-term, a fall in the price of exports will only cause a smaller percentage rise in quantity demanded.
A rise in the price imports will cause a smaller percentage fall in demand for imports. Therefore, the value of imports actually rises (we spend more on imports)
Therefore, if demand is inelastic, following a depreciation, we actually get a worsening of the current account account

Answer 167

A

In the long-term, demand for exports and imports will tend to become more price elastic. (more sensitive to price)

Therefore, a fall in the price of exports will cause a bigger percentage rise in quantity demand. (And therefore we get a bigger rise in the value of exports) When demand is elastic, the value of exports rises – and we get an improvement in the current account position.
Also, if demand for imports is price elastic, then there will be a bigger percentage fall in demand for imports. In this case, the total spending on imports starts to fall.

Answer 168

A

In the short-term, firms and consumers may have contracts to keep buying the good.
It takes time to find alternatives.
The higher price of imports will be an incentive for domestic firms to increase production, but this takes time
Elasticity and time

Answer 169

A

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 170

A

Depreciation due to current account deficit
WIDEC
Imports should ↓, Exports should ↑
So C.A deficit should imprive
BUTTT
Elastics of D+S, contracts have been signed so
Short term, imports might not reduce, exports might not imprive
So CA deficit gets worse before it gets better

Answer 171

A

This is a weighted index of sterling’s value against a basket of currencies where the weights are based on the importance/share of trade between the UK and each country

Answer 172

A

External value is set by market forces
No intervention by central bank
No target for the exchange rate

Answer 173

A

Trade/current account balances – strong trade and CA surplus see currencies appreciate as money flows into circular flow by exports and inflows of investment
Foreign direct investment – more FDI means increase in currency demand and so rising exchange rate
Portfolio investment – strong inflows of investment into equities and bonds from overseas sees currency appreciation
Interest rate differentials – hot money

Answer 174

A

Rise in policy interest rates by central bank
Currency more attractive for investors
Attracts inflows of short term hot money
Causes outwarad shift in currency demand
Currency appreaciates in value in floating system

Answer 175

A

Recession in a trading partner
Causes a fall in export sales
Worsening of trade balance
Inward shift of currency demand
Currency will depreacite

Answer 176

A

Decrease in investment from overseas will mean a decrease in demand for pounds and a depreciation of currency

Answer 177

A

Combination of fixed & floating mechanism. Central bank determines prefered currency value and thn lets the currency flucturate within a certain range of the preferred value. If it goes outisde the range then the cenral bank will intervene

Answer 178

A

Chanes in monetary policy interest rates
- Changes in interst rates - lower interst will depreciate the exchange rate
- Causes movments of “hot money” in and out of country
Quantitative easing
- Increas liquiduty in banking system, causes an outflow of money leading to depreaciation of ER
Direct buying/selling in the currency market (intervention)
Taxation of overseas currency deposits and capital controls
- Taxation of foreign deposits in banks cuts profts from hot money inflows
- Gov could introdeuce control of the free flow of capital in and out of a country

Answer 179

A

In a managed floating currrency system, one way that a central bank can influecne the external value is by changing interest rates
For example, if they want to achieve a depreciation, they might opt to lower their main monetary policy interest rate
A fall in interest rates reduces the returns on overseas money held in a country’s banking system. The real reutnr may become negative
As a result, lower interest rates might cause an outflow of short-term “hot money” from commercial banks to other countries
This will cause an outward shift of the supply curve for the currency as investors look for currencies with higher expected returns
In this way, assuming other central banks have kept their rates constant, a fall in interest rates might lead to a depreciation

Answer 180

A

When a country deliberatelt intervenes to drive down the value of the currency to provide a competitive lift to aggregate demand, output and jobs in their export industries. Countries with persitent trade deficits and rising unemployments this could be an attractive option

Answer 181

A

Can be seen as a form of trade protection so inveites retaliatory action
Goes against princples of trade based on comparitive advantage
Cutting the exchange rate makes it harder for other countries to export, negativelt affecting their growth rate which in turn can damage the volume of trade that takes place between nations

Answer 182

A

The central bank negotiates with the IMF to fix (peg) their currency to another one
Could be party so - 1 Brunei dollar = 1 Singapore dollar
Often not party so - 7.75 Hong kong dollars = 1 US$

Answer 183

A

A revaluation occurs if the Central Bank decides to change the peg and increase the strength of its currency
A devaluation occurs if the Central Bank decides to change the peg and decrease the strength of its currency

Answer 184

A

A depreciation is a fall in the external value of a currency inside a floating exchange rate system
Consider for example a deprecation of the UK £ agaisnt the Euro. The £ might fall from Euro 1.50 to Euro 1.20, a drop of 20%
As a result exporters can reduce the foreign price of goods and services sold overseas
This makes UK exports relatively cheaper in overseas markets. Relative export prices fall leading to improved competitveness
In addition, the UK price of imported products will increase £1 buys fewer euros. For example, imported cars will be more expensive
A rise in import prices will make domestic producers in the UK appear relatively more competitive purely in cost and price terms

Answer 185

A

Depreciation of the £ causes exports to be cheaper for foreigners to buy & imports to the UK are more expensive
The extent to which this improves the current account balance depends on the Marshall-Lerner condition
- This follows the revenue rule which states that in order to increase revenue, firms should lower prices for products that are price elastic in demand
- If the combined elasticity of exports/imports is less than 1 (inelastic), a depreciation (fall in price) will actually worsen the current account balance
It is also important to recognize that there is a time lag between the depreciation of the £ and any subsequent improvement in the current account balance
- This is explained by the J-Curve effect
  - It takes time for firms & consumers to respond to changes in price
  - Once it becomes evident that price changes will last for a longer period of time, firms & consumers switch
  - E.g. a firm in the USA has been importing electric scooters from the UK. If the Euro depreciates, the price of scooters in France becomes relatively cheaper. In the short-term, the USA firm will not switch immediately to purchasing scooters from France as the exchange rate may soon bounce back. They also have a good relationship with their UK suppliers. In the long term they are likely to switch

Answer 186

A

Net exports are a component of aggregate demand (AD)
- A depreciation that results in an increase in net exports will lead to economic growth

Answer 187

A

Cost push inflation is likely to occur as the price of imported raw materials increases with currency depreciation
Net exports are a component of aggregate demand (AD)
- A depreciation that results in an increase in net exports will lead to an increase in aggregate demand
- This may lead to an increase in demand pull inflation
- Could be a stimulus to GDP growth
An appreciation of the currency will have the opposite effect

Answer 188

A

If depreciation leads to an increase in exports, unemployment is likely to fall as more workers are required to produce the additional products demanded
An appreciation of the currency will have the opposite effect so decrease in exports, unemployment rises as less is produced

Answer 189

A

The impact of a depreciation on living standards can be muted
- As imports are more expensive, households face higher prices & less choice, which detracts from living standards
- Rising exports can decrease unemployment & increase wages/income which means an improved standard of living for some households
The impact of an appreciation on living standards will be the opposite

Answer 190

A

Depreciation of a currency makes it cheaper for foreign firms to invest in the country and can increase the FDI
- The money they have available to invest is worth more when the currency has depreciated
An appreciation has the opposite effect

Answer 191

A

When consumers from your country want to buy products form another, they will first have to sell your country’s currency in exchange for the other country’s currency before they can buy the product
This means dmenad for the other country increases, and that the supply of your currency increases

Answer 192

A

FDI refers to international firms investing abroad, usually into factories to decrease costs of production
Inward FDI means a firm invests into your economy (money goes in). More demadn for domestic currency
Outward FDI means a domestic firm invests in another ecnomy (money goes out). More supply of domestic currency

Answer 193

A

Some people/firms/governments may purchase financial investments from abroad. This includes stocks, options and bonds
Inward investment means someone from abroad wants to purchase investments in your country (money goes in). More demand for domestic currency
Outward investment means someone from your country wants to purchase investments abroad (money goes out). More supply of domestic currency

Answer 194

A

Remittances refers to money sent from people working abroad sending their money back to their home country
More demand for the home currency, while more supply of the original currency

Answer 195

A

Speculation here refers the purchasing of a currency in hope that its value will increase
More demand for investment currency, while more supply of the original currency

Answer 196

A

High inflation rates will make the country’s exports less competitve, which will reduce exports, which in turn reduces the demand for the country’s currency
Additionally, if inflation is hurting a currency, investors may sell this currency in exchange for a more stable one
More demand for stable currency, while more supply of the inflationary currency

Answer 197

A

High economic growth -> inflation -> central banks increases interest rates -> investors see high returns on bank depoists -> more money is put into local banks
High economic growth -> more confidence in the economy -> more investment from other countrys
More demand for high growth economy’s currency, while more supply of the original currency. Here, we assume the economic growth would increase the inflation rate

A counter point

High economic growth -> more net imports from other countries as demand outweights supply
More demand for other foreign currencies, while more supply of the high growth economy’s currency

Answer 198

A

Time lags
Size of change
Is change permanent
Coefficients of PED for exports and imports (marshall-lerner condition)
Size of any second round multiperler and accelerator effects
The type of economy (differnet for developing and develped countries)
Degree of openness of the economy to international trade (measured by value of trade as a % of GDP)

Answer 199

A

Reduces the need for a central bank to hold large amounts of currency reserves
Freedom to set monetary policy interest rates to meet domestic objectives
May help to prevent imported inflation
Insulation for an economy aftern an external shock especially for export-dependent countries
Partial automatic correction for a current account/trade deficit
Less risk of a currency becoming significantly over/undervalued

Answer 200

A

No guarantee that floating exchange rate will be stable
Volatility in a floating currency might be detrimental to attracting inward investment
A lower (more competitive) exchange rate does not necessarily correct a persistent current account deficit - consider the J curve theory and the importance of non-price competitiveness

Answer 201

A

Certainty of currency value gives confidence of inward investment from overseas businesses
reduced need to engage in and costs of “currency hedging” for businesses such as airlines
Currency stability helps to control inflation - i.e. it is a discipline on businesses to keep labour costs low
A stable currency can lead to lower borrowing costs (i.e lower yields on government bonds)
Imposes responsibility on government macro poliices e.g. to keep inflation under control
Less speculation in the curency market if the fixed exchange rate is regarded by traders as credible

Answer 202

A

Reduced freedom to use interest rates for other macro objectives such as stimulating GDP growth
Many developing countries do not have sufficiently large foreign currency reserves to be able to maintain a fixed exchange rate over some time
Difficult for countries to use a competitive devaluation of their fixed exchange rate - creates political tensions and possible retaliation
Devaluation of a fixed exchange rate can lead to a surge in cost-push inflation - this is damaging to competitiveness and has regressive impacts on poor families

Answer 203

A

Fixed rates may be optimal for developing countries wanting to control inflation
Export-dependent economies may favour a managed floating rate e.g. to offset fluctuating world prices
Not every country has the scale of foreign currency reserves needed to influence the price of a currency
The choice of currency regime is hugely important for developing and emerging countries. Some have opted to join a monetary union e.g. the 19 members of the Euro Zone

Answer 204

A

The competitiveness of a country’s exports abroad and its ability to compete with imports at home
Depends on price and non price factors such as quality, reliability and brand name

Answer 205

A

Product quality
Innovation
Reliability
Performance
Marketing
Brand loyalty
After sale services
Branding

Answer 206

A

Environmental taxes - costs for carbon emissions
Employment protection laws and health & safety regulations
Statuatory requirements - pensions
Employment taxes - employers national insurance - increased in 2024 autumn budget

Answer 207

A

The main measures are

Relative unit labour costs
Relative export prices
Quality

Others

Productivity
Unit costs
Levels of investment
R&D expenditure
Training and education

Answer 208

A

Total labour costs/ouput
Determined by

Average wages/salaries
Labour productivity

Answer 209

A

A country’s exchange rate appreciates
Wages costs rises relatively faster than other nations
Labour productivity growth is relatively slower

Answer 210

A

Monetary policy interventions aimed at a currency depreciation e.g. a managed floating exchange rate
Wage controls e.g. wage/pay freezes for people working in the public (state) sector
Supply-side measures designed to raise labor productivity/efficiency across many industries

Answer 211

A

The price of the UK’s exports compared to the exports of the UK’s main trading partners.
(High relative export prices is bad for competitiveness).

Answer 212

A

An appreciation of the currency - export price rise in overseas markets
A period of high relative inflation
Export businesses experience higher costs e.g. higher minimum wages - prices rise to protect profits so inflation
When exports are hit by import tariffs

Answer 213

A

FoP.
Exchange rates.
Economic stability.
Domestic demand.
Domestic competition.
Openness to trade.
Productivity.
Regulation.
Inflation / Investment.
Finance (access to).
Taxation.

Answer 214

A

Competitive exchange rate – maybe moving to a managed floating currency
Competitive tax environment – attract inward investment and encourage new business to set up
Investment in human capital – improves quality of the workforce – more funding for higher education
Increase r&d – drive faster pace of innovation – r&d tax credits
Stronger market competition to raise factor productivity and lower relative export prices
Stable macroeconomic environment – low inflation and steady economic growth –> business confidence and investment
Investment in critical infrastructure – better road, air and rail links, improved darts, faster broadband

Answer 215

A

Subsides – lower cost of research e.g. pharmaceuticals
Tax incentives – can encourage different aspects
Lower employment taxes – stimulate skilled migration from overseas
Lower capital gains taxes – encourage small businesses to set up
Special economic zones – attract research-intensive businesses

Answer 216

A

Macro competitiveness has important micro foundations – businesses drives it, gov is there to regulate a little
- Competitive markets and innovative business
- Skills, aptitudes, and attitudes within a diverse workforce
Competitive advantage comes from having
- Globally scaled businesses close to or at technological frontier
- Culture of innovative businesses start-ups
- A financial system that can support it all
Reliance on currency depreciation/devaluation and wage cost is not a sustainable competitiveness strategy
- The most competitive countries tend to have the highest minimum wages
- There is a continuous global battle for the most talented, highly skilled workers
- “races to the bottom” e.g. in tax rates and wages have a limited impact in the long run

Answer 217

A

A strategy to boost price competitiveness by reducing wage costs and raising productivity without currency devaluation. Achieved via fiscal austerity (tax hikes, spending cuts) and/or higher real interest rates, causing deflationary pressure. Common in fixed-exchange-rate countries (e.g., Ecuador, Eurozone members like Greece) and requires years of low relative inflation/deflation. Examples: Latvia, Greece, Ecuador post-financial crises.

Answer 218

A

A deliberate reduction in a country’s currency value (under a fixed/semi-fixed exchange rate) to boost export competitiveness and raise import costs. Goals include shrinking trade deficits and lowering the real value of sovereign debt. Faster than internal devaluation. Examples: Egypt (16% devaluation in 2016) and Ghana (17% in 2019).

Answer 219

A

Severe loss of output and rising unemployment
Fall in nominal wages reduces living standards
Risks from sustained price deflation
Real value of debt increases
Danger of a country suffering a permant loss of output (known as “hystersis”)

Answer 220

A

Increase in cost-push inflation from higher import prices
Reduces real income because of a rise in inflation
No guarantee that the trade deficit will improve (refer to the J-curve concept)
Foreign creditors will demand higher interest rates on new issues of government and corporate debt
Currency uncertainty makes country less attractive to inward FDI

Answer 221

A

Improved living standards e.g. measured by real GNI per capita (PPP)
Stronger trade performance from an increase in export sales
Virtuous circle of economic growth
Employment creation
Higher government tax revenues as incomes and profits increase

Answer 222

A

Trade surpluses might invite a protectionist response
Possible risks of demand-pull inflation
Competitiveness might be achieved at the expense of growing inequality of income and wealth
Higher productivity might be achived at expense of a worsening work-life balance and increased incidence of mental health problems
Increased competitiveness might cause a country’s exchange rate to appreciate