CH26 Government expenditure and net trade

Question 1

Why do governments spend money?

Answer 1

-to provide goods and services for their citizens
-to adjust demand over the trade cycle
-to achieve other objectives as part of their fiscal policy

Question 2

What are the main influences on the net trade balance?

Answer 2

-prices of goods
-real income in the domestic economy
-exchange rates
-the state of the world economy
-the degree of protectionism
-non-price factors

Question 3

Is the size of government spending the same for every country?

Answer 3

no, the size of gov spending varies from country to country

Question 4

In a modern economy what will the gov fund?

Answer 4

in a modern economy, the gov will fun defence, the police and judiciary, roads and education. There are then wide divergencies between economies. In a private sector economy, like the United States, the private sector is expected to provide such goods such as health care, housing and social care. In a mixed economy, the state will provide many of these goods

Question 5

What is an example of a country with a mixed economy?

Answer 5

Sweden

Question 6

Is government spending fixed?

Answer 6

yes, much of government spending is fixed from year to year

Question 7

What are government announcements about changes in spending made in?

Answer 7

made in budgets

Question 8

What is meant by fiscal policy of the government?

Answer 8

it is decisions about government spending, together with taxes and borrowing money

Question 9

Typically, what do changes in government spending reflect?

Answer 9

reflect changing priorities about how to spend money

Question 10

How can deliberate changes in gov spending affect total spending in the economy?

Answer 10

-higher gov spending can boost total spending and so affect variables such as unemployment and inflation.
-in particular, during the recession phase of a trade cycle, when unemployment is rising, governments may choose to increase their spending. This should reduce unemployment, since more jobs will be created, and boost demand in the economy.
-if the economy is in boom, the gov may choose to reduce gov spending. This should reduce demand in the economy and so reduce inflation

Question 11

What will also happen to government spending during a recession and why?

Answer 11

during a recession, government spending will automatically rise. This is because during a recession, unemployment rises and some workers earn less. These will then be a rise in gov spending on unemployment benefits and benefits to support those on low or no incomes.

Question 12

What does the impact of changes in gov spending on total spending in the economy depend on? and explain

Answer 12

depends on the levels of taxation.
-if the government raises taxes by the same amount as a rise in its spending, then there might be little impact on total spending in the economy.
-on the other hand, a rise in total spending by the government with no change in taxation will have more impact.

Question 13

What is a budget deficit?

Answer 13

when government spending is greater than government receipts such as taxation

Question 14

What is a budget surplus?

Answer 14

when government spending is less than government receipts such as taxation

Question 15

What will happen to the the budget if there is a rise in government spending with no change in taxation?

Answer 15

it will either reduce a budget surplus or increase s budget deficit

Question 16

What are exports?

Answer 16

exports are goods and services sold to foreigners

Question 17

What are imprts?

Answer 17

imports are goods and services bought from foreigners

Question 18

What is net exports / the net trade balance?

Answer 18

it is exports minus imports

Question 19

What are the 6 factors that influence the demand for exports and imports?

Answer 19

-price
-real income in the domestic economy
-exchange rates
-the state of the world economy
-degree of protectionism
-non-price factors

Question 20

How does price affect demand for imports and exports?

Answer 20

-the higher the price, the lower the quantity demanded

Question 21

How does real income in the domestic economy affect demand for exports and imports?

Answer 21

-if the economy is doing well and real incomes of households are rising, then they spend more. Part of this spending will be on imported goods and services.
-so rising real incomes suck in more imports.
-conversely, if the economy is doing badly and is in recession, real incomes will fall as so too will imports

Question 22

How does the exchange rate affect demand for imports and exports?

Answer 22

-a rise in the value of the pound means that it costs foreigners more to buy pounds with their local currency. This makes exports from the UK less price competitive and hence UK exports are likely to fall.
-equally, a rise in the value of the pound means that UK buyers can buy foreign currency more cheaply with pounds. So imports become more price competitive to UK buyers.
-a fall in the value of the pound leads to the opposite result. UK exports become more price competitive to foreign buyers. In contrast, UK buyers find that imports become less price competitive.

Question 23

How does the state of the world economy affect demand for imports and exports?

Answer 23

-if the UK’s main trading partners are doing well economically, then UK exports are likely to rise.

Question 24

What is the largest export market for the UK?

Answer 24

It is the rest of the European Union

Question 25

What affects could recession in the EU have on UK exports?

Answer 25

Recession in the EU could lead to a fall in UK exports.

Question 26

What affect will fast EU economic growth have on UK exports?

Answer 26

fast EU growth will boost UK exports

Question 27

How does the degree of protectionism affect demand for exports and imports?

Answer 27

-some countries may put quotas on goods, which are physical limits on the amount that can be imported. Or they may put tariffs on imports.
-the greater the degree of protectionism internationally, the more difficult it will be for UK firms to export.

Question 28

What is a tariff?

Answer 28

a tax on imports

Question 29

How can non-price factors affect demand for imports and exports?

Answer 29

-some imports and exports may be bought solely on price. This is particularly true where goods are of standard quality. Copper, steal or wheat, for example, are standard quality.
-However, many products are unique in quality. They may have a unique design protected by patents. It may be a unique service, such as next day delivery.
-so a whole range on non-price factors affects the competitiveness of exports and imports