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Econ > Balance Of Payments + Competitiveness > Flashcards

Balance Of Payments + Competitiveness Flashcards

1
Q

What is appreciation?

A
  • When the strength of the currency is increasing
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2
Q

What is depreciation?

A
  • When the strength of the currency is decreasing
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3
Q

What is the definition of exchange rate?

A
  • The price of one currency in terms to another
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4
Q

What effects demands from the £?

A
  • Demand for exports (UK) (affected by inflation)
  • To buy assets in that country (Swiss bank accounts) (affected by interest rates)
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5
Q

What affects supply for the £?

A
  • Demand for imports (UK)
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6
Q

What is the balance of payments?

A
  • An accounting record of the economic transactions between a country and the rest of the world in a given time period
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7
Q

Give the equation for the balance of payments:

A
  • Current account + Capital account + E&O + Financial account = 0
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8
Q

What is the current account?

A
  • A record of transactions relating to trade in goods & services, income paid to FoPs and current transfers
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9
Q

What are the three components of the current account?

A
  1. Trade in Goods & Services
  2. Primary Income comprises
  3. Secondary Income comprises
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10
Q

What is are trade in Goods & Services?

A
  • This is the X-M in AD and can be interpreted as an indicator of the competitiveness of an economy’s goods and services
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11
Q

What are primary income comprises?

A
  • net investment income earned from the provision of financial capital overseas
  • net compensation of resident employees by non-resident employers and vice versa
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12
Q

What are secondary income comprises?

A
  • net one sided transactions where the benefit would be experienced within 12 months e.g worker remittances, disaster aid, EU contributio
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13
Q

What is the capital account?

A
  • net one sided transactions where the benefit would be experienced over longer than 12 months.
  • e.g aid to finance capital works; debt forgiveness

+ non-produced, non-financial assets
- e.g purchases of land, copyrights,etc.

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14
Q

What is E&O

A
  • Errors and Omissions
  • can be quite large initially reflecting the difficulty of collecting accurate information. Tends to be adjusted downwards over the years as more data is collected
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15
Q

What is the financial account?

A
  • a record of changes in ownership of assets between resident and non-resident economic agents
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16
Q

What are the four components of the financial account?

A
  • Direct investment
  • Portfolio Investment
  • Financial derivatives
  • Other Investment & assets
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17
Q

What is direct investment?

A
  • net purchases of a controlling interest (10% or more of the shares) in foreign firms.
  • this can be interpreted as an indicator of the macro-economic attractiveness of an economy
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18
Q

What is portfolio investment?

A
  • purchases of smaller interest (shares & debt) in foreign firms and govt.
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19
Q

What are financial derivatives?

A
  • transactions in which the price of the financial instrument depends on the price of another asset.
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20
Q

What is “other investment & assets” in the financial account?

A
  • includes bank deposits, currency purchases, trade credits, and short term loans
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21
Q

What is the UKs trend in the BoT?

A
  • The UK has been running a growing deficit in its trade in goods (~154b) and a growing surplus in its trade in services (~136b). As a result the BoT has been running at a deficit for the last 20 years (~20b-40b)
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22
Q

What is the UKs trend in the Primary income & current account?

A
  • primary income has swung from surplus to deficit over the lat 20 years
  • this is because there has been growth in overseas direct and UK portfolio investment leading to an increase of outflows of investment income (financial account)
  • these flows have been volatile and have been a significant factor contributing to the current account deficit over the last twenty years
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23
Q

What is the current account deficit balanced by?

A
  • financial account surplus
24
Q

What is the UKs trend in secondary income?

A
  • deficit for last 20 years
  • recent cuts in )DA and payments to the EU has led to a shrinkage in this deficit in 2021 to $18bn
25
Q

What is the UKs trend in IIP & Financial account?

A
  • the net investment position over the last decade has been volatile and reflects a net inward inflow of investment which has helped to fund the current account deficits over the same time period
26
Q

Breakdown the UKs BoT with the EU

A

In 2021 the UKs BoT w/ the Eu was in deficit by £25b:
- primary income deficit w/ the EU was £20b
- secondary income deficit w/ the EU was £6b

27
Q

Describe the UKs BoT with the RoW

A

-In 2021 the UKs BOT was in surplus with the RoW by 7b
- The primary income surplus was £10b
- the secondary income deficit was £12b with the RoW

28
Q

What will happen to BoT if the exchange rate weakens?

A

Price of exports will decrease in foreign currency (same in domestic currency):
- volume of exports will increase
- value of exports up in domestic currency

Price of imports will increase in domestic currency (same in foreign currency)
- volume of imports will decrease
- value of imports down in domestic currency

BoT improves

(Value of imports/exports increasing/decreasing depends on PED)

29
Q

What is the Marshall Lerner condition?

A

If PEDx+PEDm >1 then the balance of trade will improve after a depreciation

30
Q

Why is the BoT likely to follow a J curve after a depreciation?

A
  • PEDx+m is likely to be <1 in the short term as consumers have behaviour inertia and firms have entered into fixed price forward contracts to reduce uncertainty.
  • PEDx+m is likely to be >1 in the long term as consumers start responding to prices while firms start negotiating forward contracts. PED becomes more elastic

Therefore balance of trade is likely to deteriorate in the short term and improve in the long term as illustrated in the J curve

31
Q

How will inflation affect BoT?

A
  • If our inflation is higher than competitors, our export prices will be increasing more so foreign demand will decrease
  • we will import more as imports may be cheaper
  • B.o.T will worsen
32
Q

How are exchange rates and BoT a self correcting mechanism?

A
  • If BoT is negative (M>X) you will be supplying more currency than you are demanding and currency will depreciate
  • when your currency depreciates more people will start buying your exports and you will import less
  • bot improves
33
Q

How may productivity affect bot?

A
  • if our productivity improves less quickly than competitor countries than inflation/costs are higher than competitor countries
34
Q

How may non price factors like poor design & quality of goods affect bot?

A
  • volume of exports may decrease
35
Q

How may rapid economic growth affect bot?

A
  • increase volume of imports
36
Q

If the interest rate decreases how does this affect exchange rates?

A
  • foreigners switch their savings to other countries
  • demand for domestic currency goes down
  • exchange rate weakens
37
Q

If there is a current account deficit how does this affect exchange rates?

A
  • foreigners demand for domestic currency is less than domestic demand for foreign currency
  • exchange rate weakens
38
Q

How does a financial account surplus affect exchange rates?

A
  • foreigners demand for domestic currency is greater than domestic demand for foreign currency
  • excvhsange rate strengthens
39
Q

What expenditure reducing policies can the government use to improve the BoT?

A
  • contractionary fiscal policy
  • contractionary monetary policy
40
Q

What expenditure switching policies can the government.use to help improve BoT?

A
  • tariffs on imports
  • quotas on imports
  • non-tariff barriers on imports
  • subsidies for exports
41
Q

What supply side policies can be used to improve competitiveness?

A
  • improving quality standards and enforcement
  • subsidies r&d to develop new products that are not available elsewhere
  • provide incentives to improve relevant skills and increase labour productivity
  • adopt labour policies that keep wage costs low
42
Q

What is international competitiveness?

A
  • Refers to the attractiveness of a countrys goods & services I n relation to other countries goods & services.
  • it is determined by prices as well as non price factors like quality, after sales service and uniqueness
43
Q

How do you measure international competitiveness in terms of trade?

A
  • terms of trade = index of export prices / index of import prices
44
Q

What happens if ToT deteriorates?

A
  • exports are becoming more price competitive relative to imports
  • living standards are worsening as the value of exports buys less imports
45
Q

How do you measure international competitiveness in terms of exchange rates?

A
  • Real exchange rates combine the impact of relative changes in inflation and exchange rates on relative prices between countries.
  • effective exchange rates are weighted averages of many currency movements with weights chosen to reflect the relative importance of each currency in the home country’s trade
  • therefore real effective exchange rates are a measure of a country’s price competitiveness with its trading partners
46
Q

How do u measure international competitiveness in terms of labour?

A
  • labour productivity = value added/ hours worked
  • unit labour costs = labour cost/ value added
47
Q

What human capital factors could impact the productivity and competitiveness of an economy?

A
  • Health
  • Education ( primary, secondary, tertiary)
  • Skills (Appropriate to the technological environment in the economy)
48
Q

What physical capital factors could affect productivity and competitiveness?

A
  • Machinery tools
  • Infrastructure
    (Utilities, transportation, industrial clusters)
49
Q

What social capital factors could affect productivity and competitiveness?

A

Governance
- Macroeconomic stability
Inflation, budget, inequality

Mobility of resources
- bankruptcy
- bad loans

50
Q

How can business improve price competition?

A
  • reduce prices by reducing margins (pricing strategies e.g limit pricing)
  • reduce prices by reducing costs (increase labour and/or capital productivity)
51
Q

How can the government improve price competition?

A
  • exchange rate (via monetary policy)
  • inflation (via monetary and/or fiscal policy)
  • reduce wage costs (via supply side policies)
  • reduce corporation tax to give pricing flexibility
52
Q

How can businesses improve non-price competition

A
  1. Improve quality + service + awareness
  2. Add features
53
Q

How can the government improve non-price competition?

A
  • have enforceable quality standards
  • provide relevant skills training
  • trade treaties and trade fairs
  • subsidies r&d; have enforceable intellectual property laws
54
Q

What is a floating exchange rate?

A
  • a currency whose value is determined by markets
55
Q

What is a managed exchange rate?

A
  • A managed exchange rate refers to currency whose value is largely determined by markets but nudged by govts action in the market to keep value within certain bounds

Econ (8 decks)

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