clompwtitivwness exchange rates Flashcards
Why might a country competitively devaluate/depreciate their currency?
Exports will be cheaper and therefore give it a competitive edge. Exports will increase and imports will decrease. So will increase AD.
How can governments attempt to manage exchange rates?
Changing interest rates- making it more attractive for foreigners to place money in the country’s bank.
Intervention on the foreign exchange market- buying its own currency. Demand would increase for the currency which would lead to a rise in price.
What is the impact when the value of a currency increases?
Price of imports fall
Price of exports rise
Current account worsens
What is the impact when the value of a currency decreases?
Price of imports rises
Price of exports falls
Current account is improved
What is the Marshall-Lerner condition?
Devaluation in a currency will lead to an
improvement in the current account position.
PROVIDED the combined elasticities of imports and exports are greater than 1.
What does the J-curve effect show us? and draw it.
In the short run devaluation is likely to lead to a worsening in the current account position.
As in SR demand for exports and imports is likely price inelastic. Reason is because it takes time for firms to change to different suppliers and contracts may need to be renegotiated.
What effect can changes in the exchange rate have on economic growth and unemployment ?
If a currency was valued then economic growth will result due to an increase in AD. Unemployment would decrease through the creation of new jobs.
What effect can changes in the exchange rate have on rate of inflation?
A fall in the value of a currency will lead to higher inflationary pressures as the cost of imports will rise.
What effect can changes in the exchange rate have on FDI flows?
A fall is likely to lead to a rise in foreign direct investment flows as the foreign firm will be able to spend less to purchase the same UK assets. However this might be less likely if the value of a currency is continuously falling as this suggests the economy is volatile and risky.
What 4 factors influence international competitiveness?
Productivity
Relative unit labour costs
Rate of inflation relative to competitors
Regulation relative to competitors
How does higher productivity impact international competitiveness?
Higher productivity improves competitiveness as it decreases unit costs.
What impact can regulation have on international competitiveness?
Increased regulation will lead to higher costs to firms and then those will lead to increased prices for consumers and therefore lead to reduced competitiveness.
Problems of international competitiveness
Exchange rates- a current account surplus can lead to a rise in exchange rates
Higher costs as country becomes more developed
Benefits of international competitiveness
An internationally competitive country can enjoy export led economic growth. Higher demand for AD and a rise in SR economic growth and a positive multiplier effect.
What impact can relative unit labour costs have on international competitiveness?
A rise in labour costs in a country maybe due to an increase in minimum wage or a fall in unemployment will create higher export prices and therefore reduced competitiveness.
