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Macroeconomics > 4.1 International Economics (Trade) > Flashcards

4.1 International Economics (Trade) Flashcards

1
Q

What is absolute advantage?

A

When a country can produce more of one good per unit of resources than another

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2
Q

What is comparative advantage?

A

Where the internal opportunity cost of producing one good in the terms of another is lower in one country

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3
Q

What is the nation with the comparative advantage numerically?

A

The one with the lower internal opportunity cost as their factor resources are more efficiently used.

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4
Q

What are the negatives (evaluation) of comparative advantage and specialization?

A
  • Ignores transport costs when trading
  • Ignores external costs of production (negative externalities)
  • Ignores gains from economies of scale and IMR
  • Assumes factors of production can be easily switched from producing one good to another (constant returns to scale)
  • assumes perfect knowledge
  • Reduces self sufficiency
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5
Q

What is the terms of trade?

A

A measure of the rate of exchange of one goods for another when two countries trade.

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6
Q

What are the terms of trade equation?

A

Terms of trade index (ToT) = Average export price index / Average import price index x 100

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7
Q

What does it mean if the Terms of trade index number incrases?

A

When the ToT index number increases, the ToT have increased because more imports can be bought for the same number of exports.

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8
Q

What are the factors influencing a country’s ToT?

A
  • Higher UK inflation can mean the ToT will improve as Exports become more expensive in real terms
  • Increases in UK productivity rates mean a fall in UK export prices, worsening the ToT
  • A fall in exchange rates leads to an increase in import prices meaning the ToT will worsen
  • Other factors include Taste, demand and YED
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9
Q

What are the benefits of a rise in the Terms of Trade (More imports can be purchased in terms of exports)?

A
  • Living standards increase as UK citizens can get more imported goods
  • Cost push inflation is reduced because of lower import prices
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10
Q

What are the dangers of a rise in the ToT?

A

Balance of trade might worsen if UK export prices rose and demand was lower than the revenue earnt.
Competitiveness of UK industries would be harmed if UK export prices were hgher.

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11
Q

What are the advantages of specilisation in international trade?

A
  • Exploitation of national comparative advantage
  • Economies of scale can be exploited
  • increased competition and lower global prices
  • Break down of domestic monopiles
  • Trade drives innovation increasing quality
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12
Q

What is the main disadvantage of specialisation?

A

Unemployment can rise when demand fluctuates due to structural unemployment

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13
Q

What are the four economic aspects of globalisation?

A

Flows of:
- Goods and Servies
- People
- Capital
- Technology

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14
Q

What is Globalisation?

A

The growing economic interdependence of countries worldwide that leads to the more rapid and widespread diffusion of technology around the world as production, investment and trade are organized on a global basis. Increase in the volume and value of transactions

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15
Q

What two factors can be compared to measure globalisation and how?

A

Growth in GDP vs Trade volume worldwide, If there is more trade than GDP growth it means globalisation is occurring as the value of goods being sold is greater than the original domestic value.

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15
Q

What two factors can be compared to measure globalisation and how?

A

Growth in GDP vs Trade volume worldwide, If there is more trade than GDP growth it means globalisation is occurring as the value of goods being sold is greater than the original domestic value.

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16
Q

What are some historical events that caused surges in globalisation?

A

Romans
Age of discovery
Internet/WWW

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17
Q

What are some historical events that have led to retreats in globalisation?

A

WW1
Cold war
GFC

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18
Q

What are the main causes of a retreat in globalisation during a recession?

A
  • Protectionism
  • Long global supply chains
  • Credit crunch
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19
Q

How does protectionism cause retreats in globalisation during a recession?

A

Tariffs that encourage portectionism disincentivise trade volumes and the value of international transactions

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20
Q

How does Long global supply chains cause retreats in globalisation during a recession?

A

Long supply chains are very responsive to changes in confidence as firms are more exposed to risk and changes in confidence. TMT Operations may be kept domestic to avoid any external shocks

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21
Q

How do Credit crunches cause retreats in globalisation during a recession?

A

Credit crunches dry up investment (reduced liquidity) so there is less global trade and investment (FDI)

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22
Q

What is the difference between a global corporation and a multinational corporation?

A

Global corporation = Does not alter its product for different cultural markets e.g. coca cola
Multinational Corporation = They will suit their products to meet the needs/cultures of a different nation e.g. Mcdonalds

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23
Q

What are the main factors contributing to globalisation in the last 50 years?

A
  • Developments in IT
  • Transport developments
  • Reductions in protectionism
  • Reduced international capital restrictions
  • The Washington consensus
  • Income elasticity
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24
Q

How has IT developments contributed to globalisation in the past 50 years?

A

The abillity to handle and transport more data has allowed firms to manage global supply chains more efficiently

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25
Q

How has Transport developments contributed to globalisation in the past 50 years?

A

Real unit transport costs have been falling on a global scale, meaning it is more worthwhile to trade globally and improving large scale containers have increased efficiency

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26
Q

How have reductions in protectionism contributed to globalisation in the past 50 years?

A

With the WTO seeking to reduce the levels of protectionism, the growth of trading blocs has stunted and has both helped and hindered globalisation

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27
Q

How has Reduced international capital restrictions contributed to globalisation in the past 50 years?

A

The UK abolished all restrictions on capital movements in 1979 encouraging inward and outward global investment. The flow of capital globally will ensure globalisation increases

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28
Q

How has the Washington consensus contributed to globalisation in the past 50 years?

A

A term for the set of policies promoted by the world bank, IMF and US treasury to be used by developing countries that recommended a market-based approach including trade liberalisation, deregulation, competitive exchange rates and fiscal policy discipline.

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29
Q

What are 6 key negatives of globalisation?

A
  • Rising Inequality
  • Negative externalities like climate change
  • LIC’s tend to shoulder the risk in business activity
  • Linked global economy means that there will be worse global recessions/financial crisis
  • Migration can lead to financial and human costs
  • A more homogenized culture
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30
Q

What is a country’s ‘Factor Endowment’ ?

A

The amount of Land, Labour, Capital and enterprise that a country currently possesses and can exploit

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31
Q

What has briefly happened to the patterns of trade?

A
  • The G7 share of global trade in manufacturing has fallen significantly
  • Trade within trade blocs like the EU have significantly increases (Trade Creation)
  • Trade with more traditional trading partners - Like the UK and the Commonwealth has been lost (Trade Diversion)
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32
Q

What are the reasons for a changing pattern of trade?

A
  • Comparative advantage
  • The Impact of emerging economies
  • The Growth of Trading Blocs and international agreements
  • Changes in Relative exchange rates
  • Increase in vertical specialisation in production
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33
Q

How has Comparative advantage changed the patterns of trade?

A

As comparative advantage changes a country may specialise in a different sector (like how the UK has moved from wool to the financial sector) which changes who the nation trades with
However, the UK has now built a comparative advantage in the financial market because of economies of concentration, meaning this will be very hard to give up in the LR.

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34
Q

How has the impact of emerging economies changed the patterns of trade?

A

As Chinese labor remains cheaper and dominates global markets (Overtaking the US as the world trade leader in 2012) more countries will trade with them instead of the US (or their traditional trading partners)

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35
Q

Why is china becoming increasingly competitive?

A
  • Special economic zones
  • High tech
  • Good infrastructure
  • Large workforce
  • Efficient transport links
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36
Q

How has the growth of trade blocs and bilateral trade agreements changed the patterns of trade?

A

They will allow trading to become more efficient and encourage trading between new and different trading partners. e.g. the TTIP (Transatlantic Trade and investment partnership) will benefit an estimated £100 bn to the EU

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37
Q

How has changes in relative exchange rate changed the patterns of trade?

A

Countries can manipulate the price of their currencies to change the balance of trade into their favour to change trade patterns

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38
Q

How has vertical specialisation changed the patterns of trade?

A

As different process of the production is distributed between countries along the supply line, differing trade patterns are facilitated.

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39
Q

What are the reasons for restricting Free trade (Protectionism)?

A
  • To protect strategically important industry
  • To protect ageing and inefficient domestic industries from foreign competition (Sunset industries)
  • To protect fledling domestic industries from foreign competition (Sunrise industries)
  • Raising revenue
  • To protect domestic producers from dumping by foreign companies or governments
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40
Q

What are some strategically important industries that may need protecting?

A
  • Energy
  • Defence
  • Water
  • Agriculture
  • Drugs and medicines
  • Basic commodities e.g. steel
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41
Q

What is an example of a sunset industry in the UK that was protected?

A

Steel, Sheffield was the global capital for steel prodiction and 142,000 worked in the industry after it was nationalised in 1967 which lowered to 30,000 in 2000 as british steel was made uncompetitive due to cheaper foreign labor and energy costs
But it was kept afloat becuase:
- The negative externalities of unemployment (social impacts)
- Defence, in times of war steel supplies would be useful
- Key in the manufacturing of other goods

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42
Q

Why might protectionism not be effective in saving sunset industries in the long run?

A

Because it isn’t effective, there is no comparative advantage
Foreign firms may also own the capital, so we are helping them the most

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43
Q

What is an example of a sunrise industry that may be protected?

A

A new car firm that needs to be protected as the car industry is very effective and sees high levels of competition

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44
Q

Why is raising revenue aspect of tariffs more important in developing countries?

A

Because Developed countries have a larger tax base and can consistently raise revenue from taxes on consumption, whilst developing countries cannot and make proportionately more revenue through tariffs.

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45
Q

What are the three ethical issues relating to protectionism?

A
  • The social and economic threats of being outcompeted
  • Human rights issues
  • Environmental issues
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46
Q

What is ‘Dumping’?

A

When a foreign company charges a price in the domestic market which is too far below the market price (e.g. below cost)

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47
Q

What are the types of restrictions on trade?

A
  • Tariffs
  • Quotas
  • Subsidies to domestic economies
  • Non-tariff barriers (NTB’s)
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48
Q

What is a tariff?

A

A tax or duty levied on an imported good by a domestic government, usually levied as a percentage of its value and varying from good to good

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49
Q

What is a quota?

A

A physical limit imposed on the amount of good that may be imported, restricting the total supply entering the domestic market

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50
Q

What are subsidies to domestic producers that restrict trade?

A

Grants made by governments to firms to reduce government costs and reduce prices to increase domestic supplies

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51
Q

What are non-tariff barriers?

A

NTB’s are restrictions that result from prohibitions, conditions or specific market requirements that make importation or exportation of products difficult/costly

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52
Q

What are the costs of tariffs on the country imposing the tariff?

A
  • Other nations may retaliate by imposing tariffs of their own
  • Domestic firms may be less efficient or innovative as they are looked after by the government (Moral Hazard)
  • Consumers lose the option to buy G+S from abroad more cheaply (welfare loss)
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53
Q

What are the Benefits of tariffs to the one imposing them?

A
  • Domestic firms will take on more workers leading to improved employment
  • Initial injection into the circular flow will ripple out into other areas of the economy, creating a multiplier effects
  • Tariffs will make revenue for government that can be injected into the economy
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54
Q

What are the costs for a country with a tariff imposed on them?

A

Higher export costs mean that revenue and profit will decrease (ceteris paribus) leading to lower AD, GDP and increased unemployment

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55
Q

What is the benefit to a country when a tariff is imposed on them?

A

In the LR the nation may be forced to specialise which could create investments and comparative advantage

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56
Q

Why might tariffs also be introduced even if the cost far outweighs the benefit?

A

Politics and populism may mean that support for whatever movement will far overshadow the slight increase in prices -> Particularly in the media.

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57
Q

What are the 7 non-tariff barriers?

A
  • Bureaucratic red tape
  • Product standards
  • Domestic content law
  • Domestic subsidy
  • Capital controls
  • Voluntary export restraint (VER)
  • Finance and telecom facilities
58
Q

How is bureaucratic red tape a non-tariff barrier?

A

Border checks, customs procedures, import licenses and more are all disincentives for foreign imports.

59
Q

How are product standards a non tariff barrier?

A

Technical barriers that slow down trade or raise compliance costs

60
Q

How is domestic content law a non tariff barrier?

A

laws by the gov to authentically control the domestic production against ‘screwdriver plants’ used to dodge tariffs

61
Q

How is a domestic subsidy a non tariff barrier?

A

Payments payed to domestic companies discourage foreign markets in competing with them.

62
Q

How are capital controls a form of non tarrif barriers?

A

Measures used to control the flow of foreign capital and currency into domestic market.

63
Q

How is voluntary export restraint (VER) a form of anon tariff barriers?

A

Sets limits on the colume/value of G+S exported to protect domestic industries and discourage foreign imports.

64
Q

How are finance and telecom facilities a form of non tariff barriers?

A

Limiting the range and extent of financial and IT services can be provided or with held from importers.

65
Q

What are the five different types of economic integration in order from least integrated to most?

A
  • Preferential trading area
  • Free trade area
  • Customs union
  • Common market
  • Economic and Monetary union
66
Q

Describe the characteristics and give an example of a Preferential trading area?

A

There is a reduction of tariffs between areas but no common external tariffs e.g. the 1975 Lome convention between the EU and ACP (African Carribean Pacific) nations

67
Q

Describe the characteristics and give an example of a Free trade area?

A

The elimination of internal tariffs, but no common external tariffs e.g. the NAFTA (North American Free trade association between USA, Canada and Mexico

68
Q

Describe the characteristics and give an example of a Customs union?

A

There is an elimination of an internal tariff and a common external tariff. E.g. The East African Federation between Burundi, Kenya, Rwanda, Tanzania and Uganda.

69
Q

Describe the characteristics and give an example of a Common market?

A

Elimination of internal tariffs and there are common external tariffs as well as the free movement of FofP and other common economic polices perhaps in agriculture or regional development. E.g. the Maastricht treaty created the European Union in 1993.

70
Q

Describe the characteristics and give an example of a Economic and monetary union?

A

Same as Common market (Elimination of internal tariffs and there are common external tariffs as well as the free movement of FofP) as well as a single currency and the harmonization of fiscal and monetary policy.

71
Q

What is the role of the WTO?

A

The WTO is the only international organization dealing with the global rules of trade between nations. It ensures trade flows as smoothly, predictably and freely as possible. Founded 1995 and has 164 member countries.

72
Q

What are the 4 ways the WTO deals with trade disputes?

A
  • Free trade through negotiation
  • Consensus negotiations
  • Most favored nation principle
  • Trade dispute settlement body`
73
Q

What is the WTO’s freer trade through negotiation policy?

A

Based on the multilateral trading system which are negotiated and signed by a large majority of the worlds trading nations and ratified in their parliaments.

74
Q

What is the WTO’s consensus negotiations?

A

Means unanimity is not necessarily found, only that no member finds a decision so unacceptable they must insist on their objection.

75
Q

Advantages of consensus negotiations?

A

No motion passes unless all countries are happy about it
There can be no tactical grouping of nations - > every vote matters

76
Q

Disadvantages of consensus negotiations?

A

An objection from a single country can undermine a large majority - arguably giving too much power to a single country.
Benefits the rich countries more as there are less of them and they cost a lot of money to attend a session - A vote may be passed in an LIC’s absence.

77
Q

What is the most favoured nation (MFN) principle?

A

Countries cannot discriminate between trading partners and all actions must be done on all memebers.

78
Q

Advantages of the MFN principle?

A

LIC’s don’t get locked out by trade barriers and tariffs
Countries should specialize and realise competitive advantage.

79
Q

Disadvantages of the MFN principle?

A

Lack of protection from foreign exports - cheaper ones that have been dumped
Gives power to brokers and speculators that affects trade values and volumes through their bets.

80
Q

What is the WTO’s trade dispute settlement mechanism?

A

The WTO has no power to enforce the decisions it has made, therefore, when there is a complaint between two nations, they may authorise retalitory measures on the part of the complaining member.

80
Q

What is the WTO’s trade dispute settlement mechanism?

A

The WTO has no power to enforce the decisions it has made, therefore, when there is a complaint between two nations, they may authorise retalitory measures on the part of the complaining member.

81
Q

Advantages of the trade dispute setllement mechanism?

A

Law takes precedence over power as no one strong country can dominate over another, as there is no subjectivity in trade disputes.

82
Q

Disadvantages of the trade dispute setllement mechanism?

A

Legal resources are expensive, therefore LIC’s may struggle to mobilize the legal services required.

82
Q

Disadvantages of the trade dispute setllement mechanism?

A

Legal resources are expensive, therefore LIC’s may struggle to mobilize the legal services required.

83
Q

What is a credit entry?

A

Represents a change in rest of world ownership in any UK asset. They get the asset and the UK gets money

84
Q

What is a debit entry?

A

Represeents a change in UK ownership of rest of world assets. UK gets the asset and the rest of world gets money.

85
Q

Difference between Debit and Credit?

A

Credit is money in
Debit is money out

86
Q

What are the four parts of the current account?

A

Trade in goods
Trade in services
Investment income
Current transfers

87
Q

What is primary income?

A

Refers to employee compensation paid to non-resident workers by virtue of their participation in the production process and investment income (payments on direct, portfolio and other investments)

88
Q

What is secondary income?

A

The secondary income account represents the provision (or receipt) of an economic value by one party without directly receiving (or providing) a counterpart item of economic value. In plain terms this is a transaction representing something for nothing.

These transfers are split between current transfers, which form part of the current account, and capital transfers which form part of the capital account.

89
Q

3 Types of transfer?

A
  1. Personal transfers
  2. Social security
  3. Current taxes on income and wealth
90
Q

What is the capital account?

A

Is a summary of capital transfers where there is no corresponding exchange of an actual good or service in the UK Balance of Payments accounts.

These include debt forgiveness and non-produced, non-financial assets (e.g. patents).

91
Q

How significant is the capital account?

A

Very insignificant, the net balance is usually less than £1BN

92
Q

What is the financial account?

A

The financial account records transactions in external assets and liabilities of the UK, for example, the acquisitions and disposals of foreign shares by UK residents. The financial account consists of direct investment, portfolio investment, other investment, financial derivatives and reserve assets.

93
Q

What are the types of investement?

A
  • Direct investment -> holding direct interest in a foreign country
  • Portfolio investment -> holding stocks and bonds available on an exchange
  • Derivatives -> contracts that derive value from the performance of an asset or index
  • Reserve assets -> Denominated in foreign currencies held by central banks
  • Other investments e.g., bank loans
94
Q

What are the two reasons for the growth of international investment?

A

Globalisation
Development of the globe

95
Q

What are causes of deficits and surpluses on the current account?

A
  • ecoonomic growth and productive capacity of UK firms
  • Competitiveness of UK firms
  • Changing comparative advantage
  • changes in price level, exchange rate and inflation
  • Falling surplus in UK’s trade in oil
  • Interest rates
  • Wealth effects
  • Brexit
96
Q

What are the arguments for the current account deficit mattering?

A
  • It is singificant in size (4% of GDP)
  • They have to be financed through loans and borrowing or returns on overseas investments
  • Reflects a lack of competitiveness
  • Can cause capital flight = when worries about the stabillity of a currency cause investors to pull out their money
  • negative macroeconomic effects on AD
97
Q

What are arguments for the Current account deficit not mattering?

A
  • it can help correct macroeconomic balances within a country
  • It is not significant in size
  • The deficit reflects strong economic growth
98
Q

What are the ways of reducing a current account deficit?

A

Exchange rate adjustment
Protectionism
Demand side policies
Supply side policies

99
Q

What are the 3 systems of currency value management?

A

Floating
Fixed
Managed

100
Q

What are floating currency prices?

A

Regime where the currency is set by the FOREX (foreign exchange markets ) based on supply and demand and compared to other currencies

101
Q

What are fixed currency prices?

A

The gov or centeral bank ties the official exchange rate to another countries, a bundle of currencies or the price of gold.

102
Q

What are managed currency prices?

A

The exchange rate can be affected by the intervention of the government or central bank.

103
Q

What terms are used under a system of a floating currency?

A

Appreciation and depreciation

104
Q

What terms are used under a fixed exchange rate system?

A

Revaluation and devaluation

105
Q

What are the factors that can change the nominal exchange rate?

A

High (relative) inflation
High (relative) UK rates
Growing UK current account deficits
Economic growth
Net FDI into the UK
More QE by UK
UK govt buys £s
Speculation

106
Q

How will high (relative) UK inflation affect exchange rates) ?

A

Higher inflation -> will cause a fall in the exchange rates.

107
Q

How does high interest rates affect exchange rates?

A

Higher interest rates attract hot money flows, causing the pound to become more sought after raising its value.

108
Q

How does a growing UK current account deficit affect exchange rates?

A

Deficit implies demand for £ is greater than the supply of £s, therefore the nominal exchange rate will fall.

109
Q

How will Net FDI into the UK affect the exchange rates?

A

An increase in FDI represents increases in demand for £UK and therefore nominal exchange rate.

110
Q

How does more QE by the UK gov affect nominal exchange rate?

A

QE increases in the domestic money supply to raise the rate of inflation that will tend to lower the nominal exchange rate.

111
Q

How will the UK gov buying £s affect the exchange rate?

A

Selling currencies will increase the nominal Exchange rate due to laws of supply and demand, while buying currency will reduce the exchange rate. the availability of the currency is limited, driving up the price.

112
Q

How will speculation affect the exchange rate?

A

Any news that factors affecting exchange rate might magnify any general trends.

113
Q

What is competitiveness?

A

A comparative measure of the ability and performance of a country to sell and produce/supply goods in overseas market.

114
Q

Which countries were at the top of the world competitiveness rankings 2021

A

Switzerland
Denmark
Sweden
Netherlands
Singapore
Hong kong

115
Q

What are the factors affecting international competitiveness?

A
  • Internal price level
  • nominal exchange rate
  • unit Labour costs
116
Q

How does the internal price level affect competitiveness?

A

if the UK’s average price level is higher compared to other coutries it will be harder for the UK to trade with them as the pound is weaker

117
Q

How does the nominal change rate affect competitiveness?

A

A higher value £ is lilely to make the UK less competitive. this is because the pound is stronger making imports cheaper and exports dearer (more expensive)

118
Q

How do Unit labour costs affect competitiveness?

A

Higher costs - deriving from higher wages - means firms raise the price of their goods, thus reducing their competitiveness.
However firms may not change the price of their good and accept lower profit margins depending on the PED of their products/services.

119
Q

Why might a country have rising labour costs but falling unit Labour costs?

A

Workers increases in productivity/efficiency are greater than the rise in costs as there is an increased marginal return.

120
Q

What are 3 ways to encourage labor utlisation (get more people working)?

A
  • Create incentives against unemployment, reducing benefits etc.
  • Raising the retirement age so people work for longer
  • Offer better childcare for working parents.
120
Q

What are 3 ways to encourage labor utlisation (get more people working)?

A
  • Create incentives against unemployment, reducing benefits etc.
  • Raising the retirement age so people work for longer
  • Offer better childcare for working parents.
121
Q

What are the non-price factors affecting competitiveness?

A

Those found in oligopolistic markets:
- Quality
- Design
- Marketing
- Delivery and after sales service

Regulation
Comparative advantages

122
Q

What areas of the economy have been deregulated?

A
  • Mobile phone provider market
  • Education (teachers now have to be less qualified but accept lower pay)
  • Privitisation of royal mail and its monopoly in 2013
  • Removal of barriers to entry in the financial sector, insurance and energy market.
123
Q

List every impact of a fall in competitiveness?

A
  • FDI falls as investors expect a lower Rate of Return
  • BOP worsesns as exports are less attractive on global market
  • Current account worsens
  • exchange rate falls
  • AS and AD both contract
  • Real output falls
  • Govt spending on infrastructure falls
  • Incomes, employments, sacings, domestic investments all fall
    Creating a lower QoL
124
Q

What are the advantages of the ‘German’ High value competitiveness approach?

A

In rich countries as incomes rise, demand for high quality products will rise
However, in a recession these products will see a large fall in demand.

125
Q

What are the advantages and disadvantages of the ‘Chinese’ Low price competitiveness approach?

A

As long as their market share remains high, they can rely on constant income with smaller profit margins
However, they realise smaller profit margins on all goods sold.

126
Q

What does depreciation of the £ lead to ?

A

Depreciation will lead to
- A depriceation in the foreign currency price of exports
- An increase in the domestic price of imports
- This will lead to an increase in the competitveness of the nations goods and sercies and the improvement of the BoP

127
Q

What is the Marshall lerner condition?

A

The Marshall lerner condition states that he current account deficit will only improve with the depreication of the £ if the sum of the price elasticities of demand of exports is greater than 1(elastics) and consumers are sensitive to a change in price

128
Q

Why will the balance of payments not improve if the elasticities of demand for exports is less than 1?

A

The devaluation of the current account should worsen the current account if PED of exports are inelastic as demand will not change much in response to a change in price/

129
Q

What is the elasticity of exports in the short and long run ?

A

The elasticity of demand for exports is inelastic in the SR and elastic in the LR

130
Q

Why is demand for exports inelastic in the SR but elastic in the LR?

A

Consumers have a lag time to respond to the price change of exports and many firms may have stocks tied up in contracts.

131
Q

How does Devaluation affect the current account in the SR and LR in accordance with the Marshall lerner condition?

A

Devaluation often worsens the current account in the SR and improves it in the LR

132
Q

What is the J curve effect?

A

Describes the situation where a countries trade balance initially worsens following devaluation and only improves in the LR

133
Q

What is the Shape of the J curve?

A

A J

134
Q

What are the 5 reasons that depricating the pound may not improve the BOP?

A
  • Elasticity of demand
  • Profit margins
  • Time period
  • Global demand
  • Economic growth/ levels of consumer spending
135
Q

Why might Elasticity of demand mean depriciation of the pound not improve the BOP?

A

Marshall lerner condition shows the BOP will only improve if the combined PEDM and PEDX is greater than 1 and elastic

136
Q

Why might Profit margins mean depriciation of the pound not improve the BOP?

A

Depreciation makes exports cheaper, but a UK firm may decide to keep the same foreign price to attain greater profit margins

137
Q

Why might the Time period mean depriciation of the pound not improve the BOP?

A

The J Curve shows that depreciation worsens the current account inthe SR but improves in the long run as demand becomes >1 and more elastic

138
Q

Why might Global demand mean depriciation of the pound not improve the BOP?

A

During 2008/9 dpreciation of the £ did not effect the BOP as there sluggish global growth and little demand for UK exports despite the fall in price

139
Q

Why might increased Consumer spending/economic growth mean a devaluation of the pound may not improve the BOP?

A

When consumer spending grows more imports will go into the UK which may worsen the BOP and current account, whereas lower consumer spending will improve the current account without a change in the £s value.

Macroeconomics (7 decks)

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