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Economics - The Global Economy > Extract 3 > Flashcards

Extract 3 Flashcards

1
Q

Exchange rate systems: Freely floating exchange rate

A

A system whereby the price of one currency expressed in terms of another is determined by the forces of demand and supply

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2
Q

Advantages of a freely floating exchange rate (4)

A
  • free to use monetary policy as inflationary control
  • Monetary policy more effective (see pg 256)
  • BoP problems corrected automatically
  • Can adjust to external shocks
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3
Q

Disadvantages of freely floating exchange rate (4)

A
  • Gov’ts can prioritise short term growth over stable inflation
  • Reliance on exchange rate depreciations to offset domestic inflation likely to be unsustainable in long run
  • Does not always improve balance of payments (Marshall-Lerner condition)
  • Loss of control over exchange rate
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4
Q

Exchange rate systems: Fixed Exchange Rate

A

An exchange rate system in which the value of one currency has a fixed value against other currencies. This rate is often set by the government

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5
Q

Advantages of fixed exchange rate (3)

A
  • reduced uncertainty, country may enjoy higher levels of trade/investment
  • reduced cost of trade (firms don’t hedge)
  • Imposes discipline on domestic firms, need to keep upping their productivity/competitiveness, cannot rely on depreciations in exchange rate
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6
Q

Disadvantages of fixed exchange rate (4)

A
  • Need to maintain high levels of foreign currency reserves (opportunity cost)
  • Loss of control over domestic monetary policy
  • chance of international retaliation due to undervaluing of currency
  • Speculative ‘attacks’ due to over or undervaluation
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7
Q

Protectionism definition

A

Gov’t actions/polices that restrict/restrain international trade, usually done with intent to protect local businesses/jobs from foreign competition

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8
Q

Case FOR protectionism (6)

A
  • protects domestic employment
  • raises extra gov’t revenue through tariffs
  • response to ‘dumping’ of imports
  • protect infant industries
  • overcome BoP disequilibrium
  • Strategic reasons (war, human rights violations)
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9
Q

Case AGAINST protectionism (6)

A
  • misallocation of resources
  • danger of “trade wars”
  • potential corruption
  • increased costs of production due to lack of competition (no incentive to reduce costs)
  • higher prices for domestic consumers
  • increase costs of imported FOPs
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10
Q

Stages of economic integration (5)

A
  • Free Trade Area
  • Customs Union
  • Single Market
  • Economic Union
  • Monetary Union
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11
Q

Free trade Area

A

-members agree to remove tariffs and quotas between them
-keep their own trade policy with other countries
(trade deflection can still happen

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12
Q

Customs Union

A
  • Members agree to remove tariffs and quotas between them and impose a common tariff on other countries.
    NTBs still exist between members though
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13
Q

Single Market

A

Members agree to remove all barriers to trade such as Non-tariff Barriers (NTBs = restrictions on movement of labour/capital)

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14
Q

Economic Union

A

Same as single market but economic policy making becomes more centralised, particularly a commmon approach towards area of area of personal and business taxation

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15
Q

Monetary Union

A

Deepest form of integration in which countries share the same currency and have a common monetary policy as a result

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16
Q

Example of FTA

A

North American Free Trade Area (NAFTA)

17
Q

Example of Single Market

A

European Union (EU) although with some countries it is a Monetary Union

18
Q

Short term impacts of economic integration (2)

A
  • Trade creation

- Trade diversion

19
Q

Impact of trade creation/diversion depends on (2)

A
  • Relative efficiencies of the members of the Union and the Non Members
  • Prices Elasticities of Demand and Supply
    Check pg 273 for details)
20
Q

Longer- term impacts of economic integration (3)

A
  • reduction in monopoly power
  • Greater innovation and R and D (due to increased competition)
  • Larger market and economies of scale
21
Q

Costs of economic integration (2)

A
  • Geographical concentration of industry risks core-periphery problem, could result in significant regional/structural unemployment
  • Can result in emergence of oligopolies and monopolies, may require agreements on competition policies (due to formation of price-fixing cartels)
22
Q

External impact of Economic Integration (3)

A
  • Trade diversion represents a loss in income for those countries outside the econ integrated area
  • Poorer countries suffer most due to their dependence on agricultural exports
  • For developed countries they can move production to within the economically integrated area and take advantage of this
23
Q

Impact of Monetary Union on domestic country at microeconomic level (4)

A
  • reduced transition costs
  • elimination of exchange rate risks
  • increased price transparency
    Overall should bring lower prices, lower costs of production, encourage investment and increase competition
  • Costs of changing currency hits smaller firms harder
24
Q

Impact of Monetary Union at Macroeconomic level (2)

A
  • Increase in AD through increased trade, investment and competitiveness
  • AS should also increase due to lower production costs, greater factor mobility
25
Q

Costs of Membership to Monetary Union (4)

A
  • Loss of control over monetary policy
  • Constraint on Fiscal Policy
  • Need for Fiscal Transfers
  • Bias, monetary policy might suit some countries more than others due to lack of economic convergence (economic cycles out of sync, this can be avoided through creating an optimal currency area)
26
Q

Optimal Currency Area

A

refers to conditions that need to be met to avoid the costs of monetary Union. These conditions include: high degree of labour market flexibility, mechanisms for fiscal transfers, absence of external shocks that impact differently on different economies. (These characteristics form an Optimal Currency Area)

Economics - The Global Economy (5 decks)

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