4.2.6 International Economy Flashcards

Question

State + explain the **arguments for trade subsidies.**

Answer 1

* **Infant Industry:** increase in DS - domestic firms can grow in size + exploit greater EoS to compete with international firms. * **Dumping:** accounted for within trade subsidy - with more S there’s less M coming in - chance of dumping less. * **Domestic Employment:** hope would increase, but at worst remain the same - now that DS are increasing their Q. * **Improve CA Position:** DS increased - reduced need for M from Q1Q2 to Q3Q2 - reduces M expenditure - improves CA position.

Answer 2

* **Price:** unchanged at PW * **Domestic Demand:** unchanged at Q2 as P remains the same. * **Domestic Supply:** increased from Q1 to Q3. * **Imports:** decreased from Q1Q2 to Q3Q2. * **Domestic Producer Revenue:** increased from a to a + b + d + e + f * **Foreign Producer Revenue:** fallen from b + c to c. * **Gov Cost:** difference between 2 supply curves: d + e + f * **DWL:** no loss of CS - due to no change in P. However is DWL in terms of world efficiency: f.

Answer 3

Process whereby countries coordinate to reduce trade barriers + to harmonise monetary + fiscal policy.

Answer 4

Group of countries that join together + agree to increase trade between themselves.

Answer 5

Agreement to reduce tariffs + quotas between 2 countries.

Answer 6

Agreement to reduce tariffs + quotas between multiple countries.

Answer 7

***Preferential Trading Area (PTA):*** * Countries join together to reduce tariffs / quotas but only on certain goods + services. ***Free Trade Area (FTA):*** * Countries join together + decide to eliminate all trade barriers between each other - but free to trade however they want with any country outside free-trade area (e.g. NAFTA) ***Customs Union:*** * Free-trade area, but without freedom of trade with countries outside customs union. * Only benefits member nations - nations outside suffer. * **Example:** EU - barrier is a tariff. ***Common Market (Single Market):*** * Customs union but with deeper integration (e.g. common policies on regulation) * Free movement between member nations (e.g. labour, capital, e.t.c.). ***Economic + Monetary Union:*** * Countries within union decide to adopt same currency, same central bank, + same monetary policy. * **Example:** Eurozone ***Full Economic Integration:*** * Country completely harmonises all policies (e.g. monetary policy, fiscal policy, political power given to one governing body, e.t.c.) * **Example:** UK

Answer 8

* Theory that derives from a country’s membership of a customs union. * **Trade Creation:** movement from a high cost domestic producer to a low cost producer inside customs union. • **Example:** EU Single Market - trade between member countries increased significantly, leading to overall economic benefits for members. German can manufacturer can now sell cars to customers in other EU countries without facing trade barriers, increasing company’s sales + profits, + consumers gained wider choice + access to cheaper goods.

Answer 9

* Theory that derives from a country’s entry into a customs union. * **Trade Diversion:** movement from a low cost foreign producer to a high cost producer within the customs union. • **Example:** creation of United States - Mexico - Canada Agreement (USMCA)- previously known as NAFTA- led to trade diversion by allowing less efficient Mexican producers to enter US market + displace more efficient producers from non-member countries- resulted in overall loss of economic efficiency in global market.

Answer 10

* **Non-Fluctuating Exchange Rate:** applies to smaller nations who’s exchange rates are quite soft / volatile - by coming into Eurozone with a much more stable currency - currency that foreign investors have much more confidence in - greater chance of stability, business confidence, + international trade. * **Reduced Costs From Currency Conversion:** good for consumers - more money to buy European goods + services that have same currency - don’t need to convert currency. Businesses save too - if countries have some currency - gets rid of cost of converting - that money can be used for I purposes. * **Increases Business Confidence:** expect greater I if currency is more stable - plan for future if exporting firm, if have to M raw materials for production purposes - can predict what P will be, as currency wont fluctuate too much. * **Currency More Stable Against Speculation:** unlikely that currency will be over / undervalued. * **Prices Between Countries Easier To Compare:** useful - especially for very small nations.

Answer 11

* **Loss Of Monetary Policy Autonomy:** (main disadvantage) if country has different set of economic circumstances to most other nations in trading bloc - no guarantee monetary policy set will be suitable for your nation. * **No Potential For Countries To Alter Their Exchange Rates:** without your own currency - no potential for you to alter exchange rate to boost trade performance. * **Cost Of Currency Conversion Very High:** removing currency from market + adopting new one - very costly process - physical cost of printing new money, taking away old money, setting up databases, e.t.c. * **Lack Of Fiscal Union:** if there’s no fiscal union to go with monetary union - countries could adopt their own fiscal policies - if reckless with fiscal policies could destabilise entire union (e.g. Greece, Portugal, Spain, Ireland, Italy, e.t.c.). Acts as major burden on other countries in Eurozone.

Answer 12

• **Trade Creation:** increases efficiency + consumer welfare. • **Access To More Markets For Firms:** easier trade allows for increased sales + profit, as well as EoS. • **Access To Lower C Materials + Inputs For Manufacturers** • **FDI:** countries may attract more FDI as multinationals look to set up within union to avoid tariffs. • **Increased Competition For Monopolies:** monopoly firm in 1 country will face more competition from firms in union.

Answer 13

• **Trade Diversion:** increased C for businesses + loss of consumer welfare. • **Loss Of Trade For Countries Outside Union:** lose access to previous markets, due to external tariff. • **Risk For Member States That Are Less Efficient:** loss of sales, decline of industry + jobs (e.g. Italy + Greece in EU).

Answer 14

• **Less Competition From Low Cost Domestic Producers Within EU:** UK domestic firms can increase sales. • **No Need To Maintain Common External Tariffs:** avoid problems of trade diversion, potential access to lower C M from elsewhere. • **Creates opportunity to sign new trade deals:** gain access to new growth markets. • **No Further Financial Contributions To EU** • **No Need To Comply With EU Rules + Regulations:** on L market + product standards. May help create more flexible L market + lower CoPs.

Answer 15

• **EU provides larger market for UK businesses:** + EOS due to no barriers to trade. Brexit led to administration barriers. • **Wider Choice Of Products:** due to free trade access to single European market. • **Impact On Labour Market:** free movement of L gave access to skilled workers across EU. UK firms now find it harder to recruit skilled labour, increased via C for recruitment. • **Ability To Attract FDI:** risk to UK of losing future FDI + of relocation of MNC’s out of UK. Many MNC’s only located in UK to get access to EU markets.

Answer 16

International organisation that regulates trade - has 164 members.

Answer 17

• **Non-Discriminatory:** countries aren’t allowed to informally have free-trade policies with one country + interventionist policies with another. All trade policies should be formally agreed, with trading agreements in place - to prevent discrimination. • **Free From Barriers (Protectionism):** ideal trade should be free, with less protectionism. • **Predictable:** trade should be predictable so that countries can foster environment + economy whereby I decisions can take place, jobs can be created well, businesses can flourish. • **Promoting Fair Competition:** trade should be fair - should be fair competition - sometimes may mean protectionist policies needed to help infant industries grow. Protectionism wont ever last long time - only used when needed, then taken away. • **Beneficial For Developing Countries Through Special Provisions:** developing countries have time / flexibility to grow + develop, before WTO rules + policies are enacted upon developing countries.

Answer 18

* **Set + Enforce Rules On International Trade:** if countries found to be breaking WTO rules - punishments can be enacted (e.g. fines). * **Resolve Trade Disputes:** if one country is getting frustrated with trade policies of another country - instead of that country enacting retaliatory protectionism against that other country - WTO can act as middle institution to solve that trade dispute - prevents continual protectionism between 2 countries. * **Provide Forum For Negotiating Trade Liberalisation:** whether between 2 countries or on global scale. Without WTO countries would have to arrange meetings, e.t.c. - very time consuming - WTO makes forming trade agreeement much quicker + easier - good for both countries + global free trade. * **To Monitor Further Trade Liberalisation:** make sure that if free trade agreements have been signed that trade is actually free + is happening as agreed. * **To Increase Transparency Of Decision Making Process:** if WTO is enacting rules / regulations - that decision making process needs to have been transparent so that all member states can understand how that decision came about - if believe rule is unfair - can critique that + hold WTO accountable. * **Help Developing Countries Fully Benefit From global Trade** * **Ensure There’s Cooperation With Other Major Economic Institutions** (e.g. IMF - when it comes to enacting economic policies).

Answer 19

* **Complexity Of Production:** countries + producers increasingly specialise in certain stages of production depending on their comparative advantage. Incentivises countries to pursue bi-lateral trade agreements rather than agree multi-lateral trade deals. * **Shifting Global Economic Power:** big challenge for WTO is to help meet aspirations of emerging nations + overcome strains in trade relationships with developed nations. * **Fragmentation Of Global Trading System:** big risk for WTO is that regional preferential trade agreements are by passing attempted to secure new global trade deals. Half X of top 3o exporting countries now go to preferential trade partners. * **Intra-Regional Trade:** exchange of virtually identical products between countries within same region. * **Regionalisation Of Trade:**7 increase in intensity of trade + I between countries within same region.

Answer 20

Measures inflows + outflows of money into a country - measures international transactions.

Answer 21

***Current Account:*** Consists of 4 sections. ***1)*** *Trade In Goods:* X + M of goods. ***2)*** *Trade In Services:* X + M of services ***3)*** *Income* Flows of income - entering + leaving country (e.g. remittances) ***4)*** *Transfers* Gov transfers (e.g. contribution of aid) ***Capital Account:*** (not relevant - never been a question on it) * Smallest part of BoP * Accounts for international transactions that are minor in nature (e.g. inheritance taxes, transfers of financial assets by migrants, debt forgiveness, e.t.c.) ***Financial Account:*** * **Portfolio I transactions:** buying + selling of financial assets (e.g. bonds, shares, derivatives, e.t.c.) * **Foreign Direct Investment (FDI)** * **Reserves:** held in currency or gold.

Answer 22

* Satisfactory balance on CA of BoP. * Neither a significant surplus / deficit + if there is its relatively temporary rather than persistent (should equal 0). * For UK - now framed as CA deficit not worsening further. * CA balance plus capital account balance measures extent to which country is net lender (in surplus) or net borrower (in deficit). * CA deficit means we have access to more goods / services through M than we can produce ourselves. * But, means we are net borrowers in international financial system - therefore need surplus on financial account to fund deficit - reliant on external finance coming into economy. * **UK Current Account Deficit:** £32.5bn - approximately 5.2% of GDP - risen over last 2 years. Expected to fall back to 3 - 3.5% over next 2 years. * UK doesn’t have signicantly large CA deficit as % of GDP.

Answer 23

* **Strong Domestic Growth:** incomes high, living standards high - people more willing to buy M to improve their material standards of living. Amount of money leaving country increases - worsening CA position -potentially causing deficit. * **Recession Overseas:** incomes abroad are falling - D for X reduces - rev generated from X decreases - worsens CA + potentially causes deficit. * **Strong Exchange Rate:** M cheaper + X more expensive (SPICED).

Answer 24

Supply side reasons are about relative cost of our X + how they are no longer competitive. More disruptive than demand side reasons - more long-term. * Low Investment * Low Productivity * High Relative Inflation * High Unit Labour Costs * Poor Quality / Reliability * Depletion Of Resources: (e.g. UK big exporter of north-sea oil - when oil depleted - amount of X fell).

Answer 25

* **Lower AD:** if country has CA deficit - likely to have negative trade balance - implies net exports (X - M) is negative - reducing AD. Lower growth in economy + higher unemployment. * **Debt Burdens:** countries that have CA deficits finance them by running financial account surpluses - by issuing more debt to rest of world (e.g. selling gov bonds, sell corporate bonds). People that buy this debt will start to lose confidence in country’s ability to pay you back - so if keep increasing CA deficit + financing it through issuing lots of debt - investors may pull away from buying debt in country that has CA deficit - worry of not being able to finance CA deficit - more + more people move money away from country - selling currency - reduces value - leads to massive currency crisis + economic crisis (can’t finance CA deficit). * **Downward Pressure On Exchange Rate:** if country is importing more than exporting - overall, S of currency will be increasing - shifts S of currency right. Net M to UK > X. In theory, may partially correct CA deficit due to WIDEC - X become cheaper + M become more expensive - should help increase D for X + reduce D for M. However, if country has CA deficit in first place, could be sign of lack of competitiveness - just by making X cheaper - no guarantee it’ll lead to sudden increase in X D. Thus, unlikely to correct CA deficit (as in UK), more likely that UK sufferers from higher M P, higher raw material P - could lead to stagflation (increasing CoPs, increasing inflation + reducing growth at same time).

Answer 26

* **As Consumer Spending Increases, So Does Demand For Goods:** in UK we have high propensity to consumer imported goods, thus improvements in economic growth + consumer spending feeds through to increased + persistent deficit. * **UK Firms Become Less Competitive In Manufacturing Of Goods:** UK firms unable to compete with low W economies, + as globalisation has increased + widened, so has UK’s reliance on imported goods. * **Exchange Rate Is Too Strong:** makes X less competitive + makes M relatively more affordable. * **Unbalanced Economy:** Both primary + secondary business activity is shrinking over time, compared with significant growth in tertiary sector.

Answer 27

Policies to reduce amount of spending on M in economy - by reducing AD, reduce incomes in economy - therefore reduce MPM. • **Contractionary Monetary Policy:** raised i.r. , reduced money supply • **Contractionary Fiscal Policy:** reduce G, increase T.

Answer 28

• **Conflict Of Objectives:** may close CA deficit + improve trade performance - but there are other more important macroeconomic objectives for gov to hit. By reducing AD - growth reduces + unemployment increases - may lead to recession. With lower demand-pull inflation - inflation may fall below target rate.. • **Consumer + Business Confidence:** if so high, AD may not fall if i.r. rise, or if T increases. • **Level Of Output Gap:** if economy already at full employment + AD shifts left - no guarantee that incomes will decrease - may still be at full employment level of output. • **MPM:** expenditure reducing policies based on idea that when incomes are lower in economy, there’ll be huge hit to M expenditure - MPM high. If not very high in economy - policies not necessarily going to reduce M expenditure enough to make an impact on closing CA deficit.

Answer 29

Gov can target certain M of goods + services + use protectionism to reduce M expenditure on those items. • Tariffs • Quotas • Embargos • Domestic Subsidies: switch spending to domestic goods instead. • Non-Tariff Barriers

Answer 30

• **Retaliation:** if policies are supposed to rectify CA deficit - retaliation could actually make CA deficit worse (e.g. by imposing tariffs on M on goods coming from abroad - trading partners abroad may not see this as a good thing at all - hurting their X performance - thus may retaliate + put even worse tariffs on M of our own goods + services) - thus X revenue may fall more than M expenditure - CA deficit may worsen. • **WTO Rules:** imposing protectionism may break their rules - heavy fines imposed, laxer rules on foreign countries to impose protectionism on us. • **Inflationary:** especially tariffs + quotas - increases P of M. • Higher Prices: for consumers. • Loss Of Efficiency.

Answer 31

WIDEC - dear M, cheap X. With more expensive M - demand + expenditure on M decreases. X being cheaper - greater D + revenue generated increases - helps improve trade position of CA. • **Reducing Interest Rates:** central bank reduces i.r. - ‘hot money’ outflow in economy - more selling of currency as investors looking to chase the best i.r. with their savings look at other countries where i.r. is higher. Reduces exchange rate. • **Increasing Money Supply:** through quantitative easing. Reduces value of exchange rate. • **Sell Domestic Currency Reserves:** by selling own currency + buying up foreign currency - creating extra supply of own currency - reduces value of it + CA deficit.

Answer 32

• **Marshall Lerner Condition:** questioning elasticity of D for X + M. If PED of X + PED M doesn’t sum to greater than 1 - then weaker exchange rate wont improve CA deficit - actually going to make it worse. In SR, likely that marshall lerner condition wont hold - see J curve effect - where initially CA deficit worsens before it improves. • **Inflation:** from demand-pull side - with AD shifting right. Also on cost-push side - SRAS shifting left - with more expensive imported raw materials + commodities - increasing CoPs for businesses. • **Retaliation + Currency Wars:** purposefully weakening exchange rate - protectionist measure - could be strong retaliation + big currency wars.

Answer 33

Boost international competitiveness of countries X - either in terms of P or quality competitiveness. * G on education * G on infrastructure * Lower income tax / corporation tax. • Privatisation • Deregulation

Answer 34

• **Time:** LR policies - take long time to work. • **Cost:** carry very large opportunity cost. • **No Guarantee Of Success:** no guarantee they’ll work. • **Need To Be Heavily Target:** (e.g. if economy has large productivity issues which increases CoPs + makes X less competitive - supply side policies to improve productivity need to be used)

Answer 35

* **Conflict Of Objectives:** any time policies cause conflict of macroeconomic objectives mention. * **Cause Of Current Account Deficit:** certain causes require specific policies (e.g. no point using expenditure reducing policies if there’s competitiveness issues as root of problem). * **Time Lags / Cost:** if short-term solutions needed, expenditure reducing policies better. If LR issues - need policies that overcome that. Policies can be very costly + carry large opportunity cost - especially supply-side policies. * **Is The Current Account Deficit Really A Problem?** Only a problem if it’s greater than a certain size (e.g. economists say if CA deficit as % of GDP is greater than rate of real GDP annually in economy - then there’s real issue with notion to intervene). Only an issue if financing it is very difficult + unsustainable.

Answer 36

• **High Incomes Abroad:** due to boom in economies of major trading partners - increases D for our X + revenue. • **Low Incomes At Home:** reduces sucking in of M, D for M, + thus expenditure on M. • **Weak Exchange Rate:** (WIDEC)

Answer 37

• **Low Relative Inflation:** inflation lower than our major trading partner economies - makes X more competitive - increases D for our X + revenue. • **Low ULC (unit labour costs):** due to high productivity, weak trade unions, low min W - keep LC low - keeps our X competitive - increases D + revenue for X. • **Strong Investment At Home:** up-to-date capital + technology - keep P low at end - more price competitive - makes our X more competitive - increases D + revenue for X. • **Gains In Comparative Advantage:** country can specialise in that area - produce lots + sell to whole world (e.g. China in recent years). • **New Resource Discoveries:** find new resources, sell them around the world - increases X revenues.

Answer 38

* Positive value of (X - M) - increases AD - growth increases - unemployment decreases - however demand-pull inflation may prevail. * **Appreciation Of Exchange Rate:** value of X exceeds value of M - more D for currency than S - leads to upward pressure on exchange rate - thus CA surplus may not be long lasting. * **Financial Account Deficit:** country must be running FA deficit to balance BoP - through buying up debt / bonds of countries that are running a large CA deficit - issue of holding debt - if country gets into problems - sitting on worthless assets - country with surplus gets into difficulty. * **Can Harm International Relations:** country that runs CA surplus may be doing so in dodgy ways (e.g. excessive protectionism, managing exchange rate) - artificial advantages - country’s that have CA deficits may retaliate - harms international relations - could lead to trade wars. * **Sign Of Unbalanced Economy:** could be if country is so reliant on X / trade for growth - all of their production will be for X / sales overseas. Could be the case that there isn’t enough consumer spending - all production is for overseas sales - not enough consumer spending + production for domestic consumers. What if D for X reduces - is there another avenue for growth - no because there’s not enough consumer spending (e.g. China).

Answer 39

Ability of a nation to compete successfully overseas + to sustain improvements in living standards + output.

Answer 40

Price of one currency in another currency (e.g. £1 = $1.60)

Answer 41

Exchange rate determined by forces of D + S - market for currency. When D + S in market change - leads to differences in P.

Answer 42

* **Increase In Relative Interest Rates:** relative to rest of world (e.g. if they’re higher in the UK than the rest of the world - then foreigners think UK is the best place to save - leads to increased D for £). * **Speculators Anticipate Increases In £:** move money quickly into £ - let it rise in value then take it away to make a profit (hot money inflows). * **Increase In FDI:** foreign firms enter UK have to pay for factories, workers, machinery, e.t.c. in £ - means exchanging their currency for £ - increases D for £. * **Rise In Incomes Abroad:** foreigners may demand UK X - have to buy in £ - involves them swapping their currency for £ - increasing D. * **Increase In International Competitiveness:** due to fall in ULC, fall in inflation, rise in I, rise in productivity - all make UK X more competitive - increases D for X - people have to buy in £ - increases D for £.

Answer 43

* **Fall In Relative Interest Rates:** investors that currently have their money in UK banks move money away from UK - increasing S of £ for another currency. * **Speculators Anticipate Falls In £** * **Firms Moving Away From Britain:** all the £ held will be swapped for another currency - increases S of £. * **Increase In Incomes Domestically:** increases D for M - buy them in another currency - exchanging £ for $ - increases S.

Answer 44

* For fixed exchange rate to be maintained - gov / central bank is required to hold large amounts of domestic currency reserves + foreign currency reserves to manipulate D + S with domestic currency.

Answer 45

• **Lower Growth:** stems from X falling - CA position likely worsening - going into deficit. • **Higher Unemployment In Exporting Industries:** because X more expensive - D for X reduces. • **Higher Unemployment In Domestic Industries:** domestic firms now need to compete with cheaper M from abroad - makes it difficult to them. If can’t compete may need to sack workers

Answer 46

* **Lower Inflation:** demand-pull + cost-push - good for economy. * **Cheaper Imports:** good for consumers - rise in material living standards. * **Potential Efficiency Gains For Domestic Producers:** now have to compete with cheaper M - domestic firms have to cut C elsewhere to increase competitiveness.

Answer 47

* **Increased Employment In Exporting Industries:** due to seeing an increase in AD - incentive to produce more - requires more L to produce extra output. * **Increase In Employment In Domestic Industries:** competition falls away - M more expensive - consumers switch + buy domestic goods instead - cheaper - domestic firms may see incentive to increase employment to match AD.

Answer 48

• **Higher Inflation:** higher demand pull + cost-push.

Answer 49

* **Extent Of Change:** how much has exchange rate appreciated / depreciated. * **Price Elasticity Of Demand For X + M:** marshall lerner condition + J curve effect. * **Restrictions On Trade:** protectionism may restrict some impacts - especially of weaker exchange rate - X may be cheaper but if there’s trade restrictions placed on exporting your goods abroad - may reduce some benefits.

Answer 50

Currency depreciation will only correct CA deficit if PEDx + PEDM > 1.

Answer 51

**EOIS:** elastic opposite inelastic same - represents relationship between D elasticity + TR for given product - if D is P elastic - if P is increased / decreased - opposite will happen to TR. ***Example:*** * Elastic: increase in P - decrease in TR * Elastic: reducing P - increasing TR * Inelastic: increasing P - increasing TR * Inelastic: decreasing P - reducing TR * **PEDX Inelastic:** decreasing P - decreasing TR (X rev decreased). * **PEDM Inelastic:** increasing P - increasing expenditure (M spending increased). * If rev generated from X is falling + spending on M is rising - due to D for X + M being inelastic - worsens CA position. * If overall elasticity of D for X + M is inelastic ( < 1) - overall (X - M) is falling - worsens CA deficit. If marshall-lerner condition doesn’t hold by depreciating currency - CA deficit worsens.

Answer 52

* In short-term when economy depreciates currency - equation often doesn’t hold in SR - due to D for X + M being inelastic - so much so that total elasticity for net exports is < 1. * Due to consumers + firms taking time to adjust to the fact that M is more expensive - continue buying + consuming at same amount. * For foreign countries buying UK X - takes them time to realise UK goods are cheaper + that it’s worth buying them. * Leads to J curve effect.

Answer 53

* Economists tend to say that whenever the exchange rate is between 2 countries - that should reflect the PPP - meaning whatever basket of goods + services cost in one country, when converted to another currency - should be able to buy exactly same level of goods + services. • In theory, if nominal exchange rates are undervalued / overvalued - should self-adjust + in floating exchange rates systems should adjust to reflect PPP. * If $ is overvalued against £ - goes further in UK - thus US consumers may think to use $ to buy UK goods + services that are relatively cheaper. * Thus, S of $ increases - as more $ are sold to buy UK goods + services - increases D for £ - leads to appreciation of £ - may move exchange rate to (£1 = $1.70) - reflects PPP + real exchange rate. * However, in reality not what happens - if currency is undervalued / overvalued - don’t see self-adjustment - speculative flows (speculation) leads to final exchange rate value for given currency - speculation can maintain undervalued / overvalued currency - not changes in M + X + D + S for currency.

Answer 54

* Applies PPP theory to actual currencies - to work out if they’re overvalued / undervalued. * Currency is compared to P of big mac in US. * Look at P of big mac in US - then look at nominal exchange rates + compare what P of big mac is in another country. * If values aren’t the same - we don’t have PPP. * If value in one currency is more than big mac P in US - overvalued currency.

Answer 55

* **Reduces Need For Currency Reserves:** when it comes to maintaining fixed exchange rates - central banks / gov needs to have large levels of currency reserves (domestic+ foreign currency). With floating exchange rates - no need to hold currency reserves. * **Freedom For Domestic Monetary Policy:** some fixed exchange rate systems require manipulation of i.r. to keep exchange rate fixed to certain currency. Whereas, in floating exchange rate - no need to worry about changes in i.r. to keep exchange rate fixed - can use monetary policy to deal with domestic issues in economy. * **Partial Automatic Correction For Trade Deficit:** naturally - partially - corrects CA deficit automatically. Country with large CA deficit / trade deficit - implies (X - M) are negative - more S of currency in terms of buying in M, then there is D for currency - S shifts right - lowering value of exchange rate - makes M more expensive + X cheaper - helps correct trade deficit. * **Useful Instrument For Macroeconomic Adjustment:** reduction in value of exchange rate - could help prop up an economy (i.e. if exchange rate fell, could help prop up X growth - helps general growth). * **Reduced Risk Of Currency Speculation:** less chance for currency to be over / undervalued - in floating exchnage rate system - exchange rates should reach equilibrium which reflects PPP - currency valued perfectly. Reduces risk of speculative attacks - more stability.

Answer 56

* **Volatility:** no guarantee they’ll be stable - left open to forces of D + S. Volatility can reduce incentives for foreign investors - puts off foreign I + trade - if X is domesticated - becomes harder to trade because foreign countries don’t know what they’re getting in terms of currency. * **Self-Correction Of Trade Deficits Unlikely:** mainly theoretical. In reality unlikely to occur - M + X are only 2 factors that affect D + S for currency - lots of other dominant factors (e.g. speculative flows). * **Inflation Concern:** country with high levels of inflation - struggling to export - (X - M) negative - puts downward pressure on exchange rate - pushes up inflation through higher M P + higher demand-pull inflation.

Answer 57

* **Lowers Exchange Rate Uncertainty:** exporters + importers know that exchange rate will be fixed at certain level - stable - promotes foreign I into country + Promotes trade. * **Some Flexibility Permitted:** in reality, countries that adopt fixed exchange rates often have a band - exchange rate can move up + down within band. If gov wants to reduce exchange rate value - can just devalue currency - however, politically not very acceptable. * **Reducing Cost Of Trade (Reduced Hedging):** people involved in trading industries in floating exchange rate systems may buy in future exchange rate market - buy £ now even through they want to buy M / X long time in future - to hedge against potential rise in £ - expensive, incurrs extra C. If have fixed exchange rate, no need to hedge - reduces C of trade - especially for importers. * **Discipline On Domestic Producers:** know they can’t rely on exchange rate falling in value - therefore if they are to maintain competitiveness - only way they can do this is to increase efficiency, to I, look at innovation, e.t.c. Good for whole economy.

Answer 58

* **Interest Rate Effects:** if fixed exchange rate is set at level where current exchange rate is lower - then exchange rate needs to rise to meet fixed exchange rate - may rise i.r. - comes with major negative consequences of reduced growth, higher unemployment, e.t.c. * **Large Level Of Foreign Currency Reserves Needed:** can large levels of foreign currency reserves be held by central banks + gov to maintain fixed exchange rates? May be too expensive / not viable - whole system collapses. * **Speculative Attacks If Exchange Rate Set Too High Or Too Low:** no guarantee that exchange rate is fixed at the right level - may be overvalued / undervalued - increased risk of speculative attacks - destabilises + destroys system.

Answer 59

* Most economies agree the merits of floating exchange rates outweigh merits of fixed exchange rates. * If there are issues with exchange rate - gov allows room to intervene + solve potential issues.

Answer 60

Country with low income per capita + low levels of human capital + infrastructure which severely limits its economic growth + development.

Answer 61

• Low levels of real GNI per capita (GNI per capita of less than $1,000 per year) • High proportion of economic output + employment is within informal sector. • High proportion of population working in agriculture + rural based population. • Dependence on primary products for X revenue. • Poor infrastructure - utilities, transport, communications • Lack of key institutions - lack of property rights, rule of law, financial markets. • Fast population growth + ‘young population’ - low median age. • Typically low levels of literacy, high infant mortality, low life expectancy, + high levels of absolute poverty.

Answer 62

* Afghanistan * Bangladesh

Answer 63

* China * India * Mexico

Answer 64

* European countries * USA * Canada * Japan

Answer 65

* Increases in real national output (income) over a period of time.

Answer 66

• **Actual Output (Short-Run Growth):** % increase in real GDP. • **Potential Output (Long-Run Growth):** ability to produce more goods + services with FoPs. • In SR, economic growth can come from increasing AD in economy that leads to higher levels of output (right shift of AD) or lower C that increases SRAS (shift right). • Over long run, for increases in output to be sustained there must be increases in productive potential of economy (right shift of LRAS).

Answer 67

* Increase in national output contributes to rising incomes and material standard of living. * Development includes broader factors that contribute to rising standard of living + quality of life across society. • Process overtime.

Answer 68

• Improved infrastructure + diversification in economy. • Improving material standard of living - higher incomes + ability to buy more goods / services. • Improving quality of life across society - access to necessities, education, health care, housing increases. • Improving well being of citizens rights + freedoms (freedom from oppression).

Answer 69

***Michael Todaro*** Asserts Economic Development Includes: • **Higher Incomes:** ability to earn higher income, buy more goods + services + be able to take part in society - about improving material standard of living. • **Availability Of Life Sustaining Goods + Services:** needs for survival can be met + are well distributed among population (e.g. foods, shelter, education, healthcare, e.t.c.) - about improving quality of life. • **Freedom Of Individuals To Make Choices:** on both social + economic level (e.g. rights, choices, freedoms) - about well being / happiness.

Answer 70

* **Human Development Index (HDI):** main way its measured - assigns each country a score based on 3 dimensions of development + quality of life: real national income per capita (PPP exchange rates), health of population (based on life expectancy), + education of population. However, doesn’t include other factors (e.g. rights + freedoms). * **Human Poverty Index:** measures range of indicators including poverty rates, life expectancy + literacy. * **Gender Based Indicators:** some indicators look specifically at gender gaps in development - often significant difference in indicators such as access to education, work, healthcare.

Answer 71

・ Doesn’t take account of qualitative factors (i.e. cultural identity, political freedoms, e.t.c.) ・ Takes no account of income distribution - if incomes unevenly distributed, GNI per capita inaccurate measure of peoples monetary well being. ・ PPP values used to adjust GNI data change quickly + can be inaccurate / misleading.

Answer 72

• **Lack Of Savings + Tax Revenue:** I requires funding. Priv sector may find it hard to raise funds due to inadequate S + financial systems which limits local I. Large size of informal economy + lack of broad tax base makes it diff for gov to raise funds for I in public services - limiting economic + human development. • **Poor Infrastructure:** lack of transport, communications, + essential utilities. More costly for firms to set up + produce - local firms can’t compete. Less attractive for FDI + MNCs to set up - limits further I in productive assets that can lead to improved capital productivity + jobs + incomes for economy. • **Corruption:** especially within political system - money + aid being misappropriated. High levels of spending on vanity projects + military. Lower level of I for public services (e,g, heath + education) that improve human development. Less attractive for FDI + for aid - lead to aid funds being cut + vital funds for improving services lost. • **Inadequate Human Capital:** LEDCs characterised by low literacy levels, poor education systems + relatively few people educated to higher level. People lack skills + training to develop + run businesses. Less attractive to FDI. -countries with very poor education systems less attractive to MNC’s as they don’t have skills required for technical + factory work. Countries that have successfully developed have had signciant improvements in education systems prior to growth (e.g. China + India). • **Primary Product Dependency (agriculture / mining raw materials):** limits X led growth. Many primary products seen P falls over last 50 years. Low value added - harder to increase profit margins - tend to become inelastic (necessities) so as other economies grow, X D doesn’t grow significantly. P can be very volatile - harder to plan LR I as earnings less predictable. 9/10 Sub-Saharan African countries are primary product dependent.

Answer 73

• **Trade Liberalisation:** removing / decreasing barriers to trade - gains from trade + potential of X led growth. But, difficulty in developing domestic industry - completion may destroy local industries, may remain reliant on agriculture / commodities due to comparative advantage. • **Removal Of Subsidies For Domestic Producers:** reduces dependence + increases efficiency - can domestic producers compete with MNCs who have EoS. • **Attract FDI:** through removal of legal barriers to foreign ownership of assets, financial / tax incentives - I in infrastructure + capital, creation of jobs, incomes + engine for growth. But, what type of jobs, exploitation of workers + environment? • **Removal Of Min + Max Prices:** allow free market to operate more freely, increases incentives to work + set up business. But can impact poverty - remove P controls on essential goods.

Answer 74

* **Infrastructure Investment:** transport, utilities, communication, e.t.c - directly impact living standards - I can create jobs + multiplier effect. Will make country more attractive to FDI. But where do I funds come from? * **Education + Training:** improve productivity of workforce - increase output + lower business C, help to support entrepreneurship + attract FDI. But, C of developing education system + takes long time to be effective. * **Investment In Tourism + Other Service Industries:** less costly to develop than many industries - many LEDCs are attractive to tourists - offers unique experience (e.g. Kenya) - brings in much needed foreign exchange, but still volatile industry + risk of environmental damage. * **Overseas Aid:** way to kick start I in infrastructure + education systems + can be LR source of funds but comes with strings attached - often trade liberalisation + sometimes requirements to purchase materials.

Answer 75

* Provides inflow of foreign exchange + helps governments in LEDCs fund development strategies. * **Example:** construction of infrastructure or health + education projects.

Answer 76

* Large proportion of aid is for disaster relief - save lives.

Answer 77

* Large part of aid - loans given below market i.r. or with more favourable repayment terms.

Answer 78

* Grants / loans that link to purchase of goods / services from donor country * **Example:** nearly 40% of aid from USA to LEDCs is tied.

Answer 79

• **Benefit From Specialisation In Industries Where There’s Comparative Advantage:** more open trade is (lower barriers) - more the gains from specialisation can be shared. But many LEDCs have comparative advantage in primary products - limits growth from specialisation. • **Trade Encourages Firms In LEDCs To Become More Efficient:** whereas protectionism + aid lead to more corruption + firms being less efficient. But companies in LEDCs may be unable to compete (infant industry). • **More Open Economy The More Attractive To FDI:** FDI’s better source of I than aid - used directly to produce goods / services - creates jobs + transfer of knowledge. But countries may need aid to improve education, health, + infrastructure before LEDC can attract FDI.

Answer 80

• **Aid Provides Vital Source Of Funds For Investment In Human Development:** especially in health + education - improved living standards of poorest + speeds up process of development. • **Provides Funds For Development Of Infrastructure:** (e.g. China - Africa Roads + rail network) - enables more trade, attracts FDI + reduces business C. • **Provides Vital Networks For Political Stability + Cooperation:** donor countries use aid as part of their foreign policy.

Answer 81

* **Corruption:** aid gets channelled to groups based on political allegiances. * **Tied Aid:** may benefit donor country more than recipient. * **Infrastructure + Delivery Systems:** may not be sufficient so aid doesn’t reach people most in need - can lead to aid being wasted (e.g. vaccines) or being concentrated in urban areas which are relatively well off compared to rural areas. * **Aid Can Be Spent On Inappropriate Projects:** wastes funds that could be better used elsewhere.

Answer 82

• **Negative Externalities In Production:** with higher production, leads, ceteris paribus, to increased negative externalities (e.g. increased air pollution, deforestation, e.t.c.) • **Regional Inequality:** if incomes unevenly distributed + contained within one sector. • **Income Inequality:** W wont rise proportionally for all - could be worsened by gender pay gaps / discrimination, e.t.c. • **Increased Working Hours / Week:** leisure time decreases + welfare could potentially go down - utilities go down. • **Exploitation Of Labour:** although growth is increasing, W may not rise in line - workers being exploited. • **Population Increases:** pollution may increase faster than GDP - not an issue for UK.

Answer 83

• **Increased Provision Of Public Services:** housing, education, healthcare increases. Due to gov receiving greater taxation rev - can fund their spending easier. • **Higher Incomes:** greater access to goods + services - people can afford necessities. PPP (purchasing power parity) increases. • **Increasing Employment:** could see potential decrease in poverty - increased income that new job provides - can now afford necessities - brings Hh / individual out of absolute poverty. Can reduce relative poverty as well. • **Harrod Domar Growth Model:** increased GDP / GNI per capita gives Hh + businesses greater financial resources to save - proposed that savings are essential + are key to increasing LRAS - funds I - S goes to bank - bank loans out that money to firms - use it to I - increases LRAS.

4.2.6 International Economy Flashcards

(108 cards)