EVERYTHING (Book & Economics Help) Flashcards
1
Q
Deficit Removal Policies - Evaluate the use of Exchange Rate Policies
A
Depends if the country is a country that naturally imports, could purely be inflationary and counter the desired effect of lowering prices due to cost-push and demand-pull inflation.
2
Q
Exchange rate policy is linked too…
A
Monetary Policy
3
Q
What does the J Curve show?
A
Shows the one lags between a falling currency and an improved trade balance.
4
Q
Show the J Curve Diagram.
A
5
Q
What is the Marshall Lerner Condition?
A
States that a depreciation of the exchange rate will lead to an improvement in the trade balance, provided that the sum of the Price Elasticity of Demand for imports and exports is greater than 1.
6
Q
What does it mean if the Marshall Lerner Condition is not obeyed?
A
Policy is ineffective, Change I Price doesn’t lead to the desired change in demand.
7
Q
What is meant by Protectionism?
A
Represents any attempt to impose restriction on trade in goods and services.
8
Q
What are the different forms of Protectionism?
A
- Tariffs
- Quotas
- Voluntary Export Restraint
9
Q
Forms of Protectionism - Tariffs
A
Is a tax or duty that raises the price of imported products and causes a contraction in domestic demand and an expansion in domestic supply.
10
Q
Forms of Protectionism - Quotas
A
These are quantitative limits on the level of imports allowed or a limit to the value of imports permitted into the country.
11
Q
Forms of Protectionism - Voluntary Export Restraint.
A
This is were two countries make an agreement to limit the volume of their export over an agreed time period.
12
Q
Evaluative points for Protectionism.
A
- Naturally are an importing country
- Retaliation
- Can lead to inefficiencies if firms are protected they are less efficient which can RAISE prices.
13
Q
What the government can do to remove a current account deficit?
A
- Investment in Infrastructure
- Deregulation of Markets
- Subsidy for business
14
Q
Government policies to remove current account deficits - Investment in Infrastructure.
A
Government could invest in roads and transport links which have positive Externalities on the firm, because they will be less congestion.
15
Q
Government policies to remove current account deficits - Deregulation of Markets
A
Can attract new businesses into the economy by lowering corporation tax.
16
Q
Evaluate the use of Deregulating Markets to improve the Balance of Payments.
A
Evaluate the use of Deregulating Markets to improve the Balance of Payments.
17
Q
Explain the affect of a fluctuating exchange rate of the Balance of Payments.
A
- Appreciation in the exchange rate would make exports less competitive and imports more competitive.
- Therefore with fewer exports and more imports there would be a deficit on the current account.
18
Q
Explain what is meant by a Current Account Deficit.
A
Occurs when the value of imports is greater than the value of exports.
19
Q
What are the different Policies to remove a Current Account Deficit?
A
- Devaluation of exchange rate (make exports cheaper – imports more expensive)
- Reduce domestic consumption and spending on imports (e.g. tight fiscal policy/higher taxes)
- Supply side policies to improve the competitiveness of domestic industry and exports.
20
Q
Policies to Reduce a Current Account Deficit - Devaluation.
A
- Involves reducing the value of the currency against others.
- If there is a devaluation of the currency, the price of imports increases and therefore demand of imports fall.
- Exports will become cheaper, and there will be an increase in the demand for exports.
- Which would lead to an improvement of the Current Account.
21
Q
Evaluative points of using Devaluation to correct the Current Account Deficit.
A
- Marshall Lerner Condition (Devaluation will improve the BoP only if the combined Elasticity of Demand for IMPORTS and EXPORTS is greater than 1)
- Depends upon the ELASTICITY of demand for exports and imports.
- J Curve (things get worse in the short term before they get better in the long term)
- Can lead to imported inflation, which can make a country less internationally competitive.
22
Q
Policies to Reduce a Current Account Deficit - Deflationary Policies.
A
- These are policies aiming at reducing the growth of aggregate demand and reducing inflation.
- They can include a tightening of fiscal policy or monetary policy which will reduce aggregate demand.
23
Q
How can Monetary Policy be used to Remove the Current Account Deficit? Explain.
A
- Increase interest rates
- Higher interest increases the cost of debt, leaving people with less disposable income because debts like mortgages become more expensive, therefore consumers import less.
- Higher interest rates reduce AD reducing the rate of economic growth thus inflation, and making UK goods more competitive.
24
Q
What is Tight Monetary Policy?
A
Increasing interest rates
25
Evaluation of monetary policy for reducing current account.
- An increase in interest rates will tend to cause hot money flows and therefore an appreciation in the exchange rate. Which makes exports less competitive, and imports more attractive.
- Depends of the performance of the economy, if the economy is performing week then a rise in interest rates may not actually reduce AD, because of high incomes and confidence
26
How is Deflationary Fiscal Policy used to reduce the Current Account Deficit?
Government could raise taxes, this would reduce consumer disposable income and reduce spending on imports.
27
What are the advantages of using Deflationary Fiscal Policy to remove the Current Account Deficit?
- Doesn’t affect exchange rates
- Improves government finances
28
Evaluate the use of Deflationary Fiscal Policy to solve a Current Account Deficit.
Conflict with other macroeconomic objectives – with lower aggregate demand (AD), growth is likely to fall causing higher unemployment.
29
How do Supply Side Policies Reduce the Current Account Deficit?
- Can improve the competitiveness of the economy and help make exports more attractive.
E.G - if the government pursued a policy of privatisation and deregulation it may help to increase the efficiency of the economy because of the profit motive in the private sector. This increased efficiency would translate into lower costs of production and more exports
30
Evaluate the usefulness of Supply-Side Policies to remove a Current Account Deficit.
May take considerable time to have an effect.
31
How could Lower Wages remove a Current Account Deficit?
Lower wages will reduce costs of production and improve competitiveness.
32
Evaluate the usefulness of Lower Wages for removing a Current Account Deficit.
Lower wages will also lead to lower aggregate demand and could lead to deflation and low growth.
33
How could Protectionism remove a Current Account Deficit?
The government could increased tariffs and quotas on imports. Would reduce imports and therefore improve the current account.
34
Evaluate the usefulness of Protectionism on removing the Current Account Deficit.
- May lead to retaliation – with other countries placing tariffs on our exports – so exports could decrease.
- Protected by tariffs – domestic industries may become uncompetitive because there is less incentive to cut costs.
35
What is meant by the UK Budget Deficit?
Annual amount the government has to borrow to meet the shortfall between tax revenue and government spending.
36
What is the UK’s National Debt?
86.5% of GDP
37
What are the different Forms of Protectionism?
- Tariffs
- Quotas
- Voluntary Export Restraints
38
Explain the different Forms of Protectionism.
- Tariffs - Is a tax that raises the price of imported products and causes a contraction in domestic demand.
- Quotas - These are quantitative limits on the level of imports allowed or a limit to the value of imports permitted into the country at a certain time period.
- Voluntary Export Restraint - this is where two countries make an agreement to limit the volume of their exports to another over an agreed time period.
39
Evaluate the use of Protectionism to remove a Current Account Deficit.
- Naturally an importing country
- Retaliation
- Can lead to inefficiencies if firms are protected they are less efficient which can RAISE prices
40
How can Government Investment in the Domestic Industry remove the Current Account Deficit?
- Improving transport links can have positive Externalities on the firm, because it reduces congestion and reduces a Firms costs.
- Deregulating Markets - Can attract new business into the economy by offering lower corporation tax.
- Subsidy for Businesses - Targeting Export led industries
41
Evaluate the use of Government Investment in Domestic Industries.
- Expensive and doesn’t help the debt
- Deregulating markets, the new firms may just send money back to their own country so it may not work.
- On its own may have little effect
42
How do Supply Side Policies Remove a Current Account Deficit?
- It works against cost-push inflation which increases supply and lowers price.
- Improved the competitiveness of the economy and helps make exports more attractive
43
Evaluate the use of Supply Side Policies to Remove a Current Account Deficits.
- May take a considerable amount of time to have an affect
- Conflict with other policies
- Conflicts with the DEBT
44
How could Deflationary Fiscal Policy be used to Remove a Current Account Deficit?
Contractionary Fiscal Policy
45
Evaluate the use of Deflationary Fiscal Policy to Remove a Current Account Deficit.
- Could increase unemployment
- Negative impact on domestic industry
- J Curve
46
Deficit Removal Policies.
- Raise interest rates
- Contractionary Fiscal Monetary or Fiscal Policy
- Want to lower AD, which would lower price
- Lower demand means less imports and exports more competitive because they are cheaper.
47
How could Expenditure Reduction Policies to Remove a Current Account Deficit?
- Increase Income Tax
- Cuts in government spending
48
Evaluate the use of Expenditure Reduction Policies to Remove a Current Account Deficit.
- Only works if Marshall Lerner Condition is true
- J Curve
49
How can Current Controls be used to Remove Current Account Deficits?
Limit the amount of foreign currency someone can exchange into pounds, it limits someone’s spending power abroad.
50
Evaluate the use of Currency Controls to Remove a Current Account Deficit.
Difficult to control, creates a BLACK MARKET
51
Does a Deficit on the Balance of Payments really matter?
Auto Corrects itself ( A Floating Exchange Rate sorts itself out)
52
What can ignoring a Deficit of the Balance of Payments lead to...
- Structural Weakness
- Imbalanced economy
- Loss of output and employment
- Money flowing out and problems financing the debt
53
Why might a Country have a Current Account Surplus?
- Export Orientated Growth
- FDI
- Under valued exchange rate
54
What is meant by Exchange Rate?
Is the rate at which one currency trades against another on the foreign exchange market
55
What is meant by a Floating Exchange Rate?
When the value of the currency is determined by market forces – supply and demand for currency
56
What is meant by a Fixed Exchange Rate?
Where the government seeks to keep the value of a currency at a certain level compared to other currencies.
57
What are the factors that influence the Exchange Rate?
- Exchange Rates
- Economic Growth
- Inflation
- Confidence
- Current Account Deficit/Surplus
58
How do Interest Rates affect the Exchange Rate?
Higher interest rates encourage hot money flows and demand for currency causing an Appreciation.
59
How does Economic Growth affect Exchange Rates?
Higher economic growth will cause an appreciation in the currency, because markets expect higher interest rates – when growth is rapid.
60
How does Inflation affect Exchange Rates?
Higher inflation makes exports less competitive and reduces demand for currency. This causes a depreciation.
61
How does a Current Account Deficit/Surplus affect the Exchange Rates?
A Current Account Deficit will cause a depreciation in the Exchange Rate because more money is leaving the economy to buy imports.
62
What are the effects of an Appreciating Exchange Rate?
- UK exports more EXPENSIVE
- Imports into the UK are CHEAPER
- Reduce Inflation
- Lower Economic Growth, due to less export demand
- Worsening of the Current Account Deficit.
63
What does SPICED mean?
Strong
Pound
Import
Cheap
Exports
Dear
64
What are the effects of a Depreciating £?
- UK exports become more competitive, increased demand for exports
- Imports are more EXPENSIVE, lower demand for imports
- Increases Economic Growth
- Increases Inflation
65
Evaluate the affect of Exchange Rate Fluctuations.
- Depends on the Elasticity of Demand, if demand is inelastic then it has no effect if demand is elastic fluctuations in exchange rates have greater effects.
- Time Lag, in the short term the demand for exports is often inelastic but in the long term it becomes more elastic.
66
What is the purpose of Supply Side Policies?
- Works against cost-push inflation, therefore increases supply and lowers inflation.
- Improved the competitiveness of the economy and helps make exports more attractive.
67
What can Deflationary Fiscal Policy be called?
Contractionary Fiscal Policy
68
What are the other Deficit Removal Policies? And why do we implement these?
- Raise Interest Rates
- Contractionary Monetary or Fiscal Policy
Why?
Lower AD which will lower price
Lower demand means less imports and more exports because they are more competitive
69
How does the Government create Expenditure Reduction Policies?
- Increase Income Tax
- Cuts in Government Spending
70
Evaluate the use of Expenditure Reduction Policies to improve the Balance of Payments.
- Only useful if the Marshall Lerner Condition applies
- J Curve
71
Explain what is meant by Current Controls.
Limiting the amount of foreign currency someone can exchange into £ for, this is because it limits a persons spending power abroad.
72
Evaluate the use of Current Controls to improve the Balance of Payments.
Can create a Black Market
73
Reasons why a Balance of Payments Deficit May not actually matter.
Auto Correct itself, floating exchange rates seems to sort themselves out
74
What will happen if you IGNORE a Balance of Payments Deficit?
- Unbalanced Economy
- Loss of output and employment
- Money is flowing out of the economy so will experience problems financing the debt.
75
Why might some countries have a Balance of Payments Surplus?
- Export led growth
- Foreign Direct Investment
76
What are the structural causes of a Current Account Surplus?
- Surplus of Savings or Investment
- Long Run Competitive Advantage
- Rise in global prices of a countries main exports
77
What are the Cyclical causes of a Current Account Surplus?
- Depreciation of Exchange Rate
- Large demand in key export markets
- Falls in price of components
78
What is the significance of a Current Account Surplus?
- Contribute to GDP
- Might cause demand-pull inflationary pressure
- Accumulations of Foreign Currency Reserves
- Appreciating Currency
79
Define the term Exchange Rate.
Value of a currency against another.
80
What is meant by a Floating Exchange Rate?
Value is determined by supply + demand
81
What might of caused an increase in Demand for the £?
- Interest rates rising
- Cutting corporation tax which increases FDI
- Demand for exports
82
What is it called when the £ (or a Floating Exchange Rate) Increased in Value?
APPRECIATES
83
What is it called when the £ (or a Floating Exchange Rate) Decreases in Value?
DEPRECIATION
84
Define a Spot Exchange Rate?
Is the current value of a currency
85
Define a Forward Exchange Rate?
Involves the transaction of currency at a specified time at an agreed rate.
86
Define Bi-Lateral Exchange Rate?
The rate at which one currency can be traded against another.
87
What are the Factors Influencing Exchange Rates?
- Balance of Payments Surplus (Trade Balances), Surplus = appreciation of the exchange rate
- Foreign Direct Investment (FDI)
- Portfolio Investment (similar to FDI, but individuals invest in stocks and shares)
- Interest Rates
88
Advantages of a Floating Exchange Rate?
- Automatic Stabilisation (Any disequilibrium in the Balance of Payments would be automatically corrected)
- Management (Governments are free to manipulate the external value of their currency to their own advantage)
- Reduced need for currency reserves
89
Disadvantages of a Floating Exchange Rate.
- Volatility (which makes doing business harder, an unexpected fall in exchange rates can be a cause of rising inflation)
- Reduced Investment (The uncertainty associated with a Floating Exchange Rate May discourage FDI)
90
What are the ADVANTAGES of a FIXED EXCHANGE RATE?
- Avoids Currency Fluctuations
- Encourages firms to invest
- Incentive to keep inflation low, because a devaluation leads to higher inflation
91
What are the DISADVANTAGES of a FIXED EXCHANGE RATE?
- Conflicts with other Macroeconomic objectives (most effective May to increase the value of a Fixed Exchange Rate is to raise interest rates which lowers AD, and therefore lowers Economic Growth)
- Less Flexibility (Difficult to respond to temporary economic shocks)
92
Arguments FOR and AGAINST Fixed or Floating Exchange Rates.
- Fixed exchange rates may be best for developing countries wanting to control inflation.
- Not every country has enough reserves to influence currency
93
Define a Managed Floating Exchange Rate.
Is when the central bank may chose to intervene in the foreign exchange markets to affect the value of a currency to meet specific macroeconomic objectives.
94
How does a government manage exchange rates?
- Changes in monetary policy interest rates (which causes changes in hot money flows and therefore demand for the currency)
- Direct buying and selling in the currency market
95
Why might a country want to depreciate its currency?
- Improve balance of Payments and Current Account
- Reduce risk of recession (SPICED, deflation)
- Rebalance economy away from domestic consumption towards exports and investment, more exports less imports
96
How does Competitive Devaluation impact economic targets?
- Causes export led growth, causes domestic goods become more competitive to foreign buyers.
- Leads to improved economic growth, and reduces unemployment
97
Evaluate the use of Competitive Devaluation on reaching economic targets.
- Depends upon wether a country is a natural importer
- Because a Devaluation will cause import prices to rise which could lead to improved inflation
98
How does a Competitive Devaluation affect the Balance of Payments?
- Makes domestic goods more competitive and therefore increases exports and reduces the demand for imports.
- However, could affect inflation negatively if country is a natural importer
99
How does a Competitive Devaluation affect Unemployment?
Increases the amount of FDI, therefore increases the amount of jobs available, leading to lower unemployment.
100
Define the Purchasing Power Parity Theory.
The rate at which the currency of one country is converted into that of another to purchase the same amount of goods / services in each country
101
What is the Big Mac Index?
Is a simplified indicator of a countries individual purchasing power
- Think of like this - how much a big max costs in the UK compared to Vietnam
102
How do you calculate a countries PURCHASING POWER PARITY?
(Price of Basket of goods in US/country A) / (Price of Basket of goods in Cyprus/country B)
103
Evaluate the use of Exchange Rates to measure GDP.
Exchange Rates can be volatile from month to month from year to year
104
Exchange Rates can be volatile from month to month from year to year
- Different types of product, not all products are homogeneous
- Difference in the quality of good / service are reflected in price variations
105
Explain what is meant by a Cyclical Budget Deficit.
Takes into account fluctuations in tax revenue and spending due to the economic cycle.
106
Explain what is meant by a Structural Deficit.
This the level of the deficit even when the economy is at full employment.
107
Explain what is meant by the term Net Borrowing.
Net borrowing includes net investment and is considered to be the main deficit figure.
108
Factors that affect the size of the budget deficit
- Economic cycle.
- Level of interest payments
- Structural deficit
- Fiscal Policy
109
Factors that affect the size of the budget deficit - Economic Cycle
- Tax revenues will be lower.
- Fewer people are working, therefore, income tax will be less
- Consumer spending is lower, therefore, VAT receipts are lower
- Firms make less profit, therefore a fall in corporation tax.
- Government spending will increase:
- More will be spent on unemployment and welfare benefits
110
Factors that affect the size of the budget deficit - Level of interest payments.
Higher bond yields will increase interest payments and the budget deficit.
111
Factors that affect the size of the budget deficit - Structural Deficit.
If the government commit to investing in infrastructure, there will be higher borrowing.
112
Factors that affect the size of the budget deficit - Fiscal Policy
Expansionary Fiscal Policy involves higher spending and lower taxes which will increase the size of the budget deficit.
113
What are the effects of a Budget Deficit?
1 - Rise in national debt
2 - Higher borrowing leads to increase in aggregate demand (AD)
114
Definition of expansionary fiscal policy.
This involves the government seeking to increase aggregate demand – through higher government spending and/or lower tax.
115
How is Expansionary Fiscal Policy financed?
Financed by increased government borrowing
116
How does Expansionary Fiscal Policy Work?
- If the government cut income tax, then this will increase the disposable income of consumers and enable them to increase spending.
- Higher consumption will increase aggregate demand and this should lead to higher economic growth.
117
How can a government reduce a Budget Deficit?
1 - Cut government spending
2 - Increase tax
3 - Achieve faster economic growth.
118
When does a Budget Deficit occur?
A budget deficit occurs when a government spending is greater than tax revenues.
119
Different policies to reduce a budget deficit
1. Cut government spending
The government can cut its public spending to reduce its fiscal deficit.
120
Evaluate the use of cutting government spending to improve the budget deficit.
- Can lead to a decline in economic growth, leading to lower tax revenues and rising debt.
- Difficult to devalue a fixed exchange rate
- Cutting investment may have the opposite effect
121
Define Globalisation.
Is the world coming together to trade in each others markets
122
What are some of the aspects of Globalisation?
- Trade in Goods & Services
- Specialisation and a Competitive Advantage
- Movement of Labour
- Trade Liberalisation
123
What are the Benefits of Globalisation?
- Increases trade
- Increased economies of scale, enabling lower prices
- Increased competition pushing down prices
- Increased choice of goods, services and opportunities for work
124
What is the Problem for America if production moves from America to Mexico?
- Worsens GDP
- Increases unemployment
- Worsens the Balance of Payments
- Individuals have less disposable income
- Less government revenue from taxation
125
Is it really that bad for America if production moves from America to Mexico?
- Products will be cheaper for US citizens
- Depends on the magnitude of the move
- Will receive redundancy payments
- Opens opportunities for new companies to move
126
Define Foreign Direct Investment.
When a Global Firms sets up a factory or makes an ownership investment in another country
127
What are the COSTS of Globalisation?
- Growth of global monopolies with the opportunity to exploit consumers
- Environmental costs from increased use of raw materials
128
How has Coca Cola FDI in Isreal benefitted in Isreal?
- Creates employment
- Government receives extra tax revenue
- Improves Innovation
- Improves infrastructure in Isreal
- Improves technology
129
What are the Problems with Foreign Direct Investment (FDI)?
- Profit made is sent back to the companies original country
- Politics in foreign country can make investment risky
- Exploitation
- Poor working conditions
- Has affected local businesses
- Makes a country reliant on FDI
130
What are the advantages of Globalisation to employees?
Workers because they create employment for those out of work, it provides an income for those who live in very poor countries.
131
What are the disadvantages of Globalisation on Employees?
Can become dependant on the employer, lower wages, poor working conditions and encourages illegal immigration.
132
What are the advantages of Globalisation to Consumers?
- Lower Prices
- Greater choice because money is saved for resource development
133
What are the disadvantages of Globalisation to Consumers?
- Loss of jobs from the domestic economy
- Products may be of a lower quality
134
What are the advantages of Globalisation to Producers?
Pay less tax because they can state products were sold in a country that has lower cooperation tax.
135
Define Emerging Markets.
Is a country that has some characteristics of a developed market
136
Describe the Characteristics of Emerging Markets.
- Debt
- Lower Incomes
- Fast Growth
- Attractive Factors of Production
- FDI
- Highly Volatile
137
What is the purpose of Trading Blocs?
Are created to encourage trading partners to buy and sell goods amongst its members
138
What do Trading Blocs do?
- Give the most favourable trading conditions to its members
- Give less favourable conditions to non-members
139
Define a Free Trade Area.
An area were there are no tariffs or quotas on goods/services entering the country.
140
Define Customs Union.
Collection of countries which agree to abolish tariffs and quotas between member nations to encourage free movement of goods/services
141
Define Common Market.
A formal agreement were a group is formed among several countries in which each member country adopts a common external tariff.
142
Define Economic Union.
Is an agreement between two or more nations to allow goods to move over borders freely, co-ordinate social and financial policies to support this common market.
143
What are the Problems of EU membership?
- Lack of democracy
- Can lead to domestic unemployment
144
What are the Benefits of EU membership?
- Free movement of Labour
- Workers rights
- Health & Safety Regulations
- Freer movement of trade
145
Define Trade Creation.
**When you have access to cheaper tariff free trade (goods costs go down)**
146
Define Trade Diversion.
When tariffs are put on imports meaning costs of international exports goes up.
147
What does the IMF stand for?
International Monetary Fund
148
What does the IMF do?
- Promote exchange rate stability (stabilise the currency)
- Helps deal with BoP issues (Can't pay for imports)
- Economic surveillance (produces reports on member countries economies and suggests areas of weakness / possible danger
- Loans to countries with financial crisis
149
What are the Advantages of the IMF?
- Promote international monetary co-operation and global financial stability
- Provides temporary financial help to countries in debt
- Encourages economic growth
150
What are the disadvantages of the IMF?
- Decisions about which countries may borrow money are made by richer countries, and have greater control over the type and conditions of the loan
- Will only lend to countries who agree to certain conditions, these conditions increase poverty
- Undemocratic
151
