Economics paper 2 II Flashcards
Current account surplus (positive number) benefits
- Reflects rising total demand for domestic goods, linked to decreased unemployment, higher income tax revenue, and lower benefit payments
- Decreases debt of country as more money is flowing into the country from exports more than paying for imports
Current account surplus concerns
- Rises inflation within the domestic economy - pressure on prices as total demand increases for domestic products
- Hides the causes of a negative impact global economic growth such as protectionist policies which made domestic goods artificially advantageous.
- Rise in exchange rates, decreases international competitiveness of UK goods
Current account surplus causes
- Strength in economy eg high quality products at a low price
- Lack of growth in domestic economy - consumers may buy fewer imports, while domestic firms compete to sell more abroad
- Fall in exchange rate increases exports abroad
- Net flow of investment income
Current account deficit causes
- Structural problems in economy - firms overpricing goods, poor quality, goods no longer in demand
- Falling incomes overseas, failing exports
- Rising incomes in domestic economy - more imports
How exchange rates are affected through supply and demand
Exchange rate rises by either a rise in demand for pounds or a decrease in supply of the currency
Effects of changes in exchange rate rise for consumers
- Import prices fall - more willing to buy
- Improved standard of living
- Increased tourism overseas - pound will buy more foreign currency
- Fall in inflation - total demand falls, imports grow and exports fall, prices drop
What is globalisation?
- The interdependence of countries due to international trade
What are the driving forces for globalisation?
- Reduction of barriers to international trade - reduced taxation and regulations that restricted movement of resources
- Improvements in transport - allowed development of huge container ships resulting in economies of scale - more profitable to trade worldwide
- Worldwide foreign investment - allowed countries to thrive
- Advances in tech and communications - easier for producers to have parts of their businesses in other countries - eg finding suppliers, online banking
Current account deficit benefits
- If temporary, the increased imports of raw material and capital goods can be put into production of goods that will be exported and increase economic growth
- Reduces inflation
- Fall in exchange rates - increase international competitiveness - imports are greater than exports - less demand, less pressure
- Only a small % of GDP so debt can be paid with less difficulty
Current account deficit concerns
- Caused by problems in the economy such as falling total demand for domestic goods - low international comp, poor product quality
- Long time period to change eg low productivity - hard for the country to finance
- National debt increases - can lead to higher unemployment
- Country may have to take harmful action to remedy - eg cut gov spending - high opportunity costs
How would demand for the pound may increase, heightening the exchange rate?
- UK goods become more desirable
- Incomes rise in the eurozone, consumers can now afford to buy more goods
- Interest rates in the UK rise relative to other countries’ interest rates, so savers save more in the UK for the increased reward
- Corporation tax decreases, so overseas producers want to set up businesses and trade from the UK as a base
- Future predictions - worthwhile buying pound now for exchange for euro in the future
How would supply for the pound increase, lowering the exchange rate?
- Eurozone goods become more desirable
- Incomes rise
- Interest rate in the eurozone rise (basically demand but replace eurozone and Britain)
Effects of exchange rate rise for producers
- Fall in import prices - average costs will be lower
- Increased tourism
- Rise in export prices - :(
- Fall in inflation - less need for wage rises, but not high price
What are the key indicators for measurements of development?
GDP per capita - high GDP, high econ growth, workers paid more to increase output - can afford more
Life expectancy reflects standard of living
Access to healthcare
Technology - links to education, etc
Costs of globalisation for producers
- Possible decline of industry - less developed countries may have a cost advantage like low wages - can’t compete
- Vulnerability to problems in the worldwide economy - if incomes fall in undeveloped countries, producers in developed countries can’t export as much, harm business
- Increased production costs such as increased administration costs
