Balance Of Payments And Stop Go Flashcards
What is inflation and deflation
- Inflation or deflation is difference between prices over time and is calculated by comparing the average price of a range of products with the same price the year before
Inflation = prices are rising
Deflation = prices are falling - modest level of inflation of 5% is considered a good thing - economy is steadily growing - more jobs, more spending etc
- however inflation can rise too quickly and get out of control, hitting double figures means it becomes a problem - cost of living crisis
- currently at around 7.9% after 10.1% in 2022
- if deflation occurs, economy starts to shrink so fewer jobs
What is Balance of Payment?
- difference between a country’s imports and exports
- if a country is exporting more than importing it is ‘in the black’ or in credit so it making money
- if a country is importing more than exporting it is ‘in the red’ so is losing money
- in theory a country can become bankrupt if it spends more than it earns
Why was there a looming economic crisis in 1957-1964?
- rising inflation and wages
- too many imports and failing exports
- weak productivity
- growing trade union power
- collapse of the empire and falling share in the world markets
How did rising wages and inflation affect the crisis?
- new products and demand meant that prices rose
- therefore wages also had to rise which would then increase prices even more
What was the balance of payments crisis?
- too many imports
- Britain had been importing too many goods and materials in the late 1950s
- rising cost of British products made them expensive compared to other countries so exports fell as well
- some invisible products such as banking and finance were growing but not physical trade
- Britain had a sizeable balance of payments deficit that was growing monthly
- quietly loomed in the background
Why was weak productivity an issue
- manufacturing base of other European countries like Germany and France were being rebuilt after WW2 so new machinery was being build
- However Britain was paying the price with out of date machinery, factories and production methods
- Places like Germany worked at much quicker rate
What were the Marshall Plan Payments?
USA loaned money to help rebuild shattered economies
- GB received 3.1 billion dollars
- France received 2.7 billion dollars
- Italy received 1.5 billion dollars
Why were rising wages an issue?
- British workers were being paid more than their counterparts in other countries to produce the exact same thing
- Therefore the British industry was becoming internationally uncompetitive
Why was Trade union power a problem?
- Unions grew stronger in 1960s and 1970s but even by the late 1950s they had enough power behind them to demand continued pay increases
- some industries such as coal mining were heavily unionised and labour intensive giving union more power
- if the government felt that the economy was growing too quickly and tried to freeze wages, the unions would strike
- this limited the governments options when trying to control the economy
Why was the collapse of the empire a problem?
- In the early 1900s, buoyed by the raw materials and markets provided by its empire, Britain was an international economic super power
- But in the 1950s, the empire collapsed and was gradually caught up by newly emerging economies
1950 world market share
Uk = 25% USA= 27% Germany= 7%
1962
Uk = 15% USA= 20% Germany= 20%
How does Stop Go Economics work?
- If inflation rises and the economy overheats, the government increases taxation and interest - people give more to the government so have less to spend
- increasing interest rates make it worthwhile saving so people put money into the banks and take out fewer loans
- If inflation is falling and economy falters the government does the opposite by reducing taxation and interest rates - people have more disposable income
- reducing interest rates make it more worthwhile to spend so people take money out of banks or a loan to buy hat they want
What is the definition of Stop Go Economics
the economics of ‘stop-go’ derived its name from the tensions between an expanding economy, with low interest rates and rising consumer spending (‘go’) and the results of the economy overheating, with wages and imports exceeding productivity and exports, necessitating a deliberate slowing down, or deflating of the economy (‘stop’) through higher interest rates and spending
Stop Go Economics example
STOP = if inflation increased the government may respond by putting interest rates but the rise in interest rates will lead to economic slowdown. This is because borrowing is more expensive and it will discourage consumer spending and investment. If interest rates increased too much it can cause an economy to go into recession
GO = if economic growth was below the trend rate of growth and there was unemployment, the government may respond by cutting interest rates. This provides a boost to domestic spending and could cause a rapid increase in economic growth. This will lead to an uptick in inflation and could cause an unsustainable economic boom.
What are the strengths of Stop Go?
- flexible short term measure of correcting the economy
- produce short term economic success such as rising living standards and wage levels
- ‘go’ can avert rising unemployment whereas ‘stop’ can control inflation
- people have confidence in economy
What are the weaknesses of Stop Go?
- erratic short term measure that causes instability, producing mini booms and slumps
- hides serious long term economic weakness such as industrial inefficiency
- go causes rising inflation and imports
- stop can cause unemployment
- gives government opportunity to bribe voters with giveaway budgets, so puts short term political gain ahead of the country
- lack of confidence
