International Economics

Question 1

Name 2 Pros of a Floating Exchange Rate

Answer 1

• Reduces the need for Currency Reserves
• Domestic Monetary Policy can move freely, unlike in some Fixed
• Can partially correct the Current Account Deficit
• Can be used as a macroeconomic tool by promoting export-led Growth

Question 2

Name 2 Cons of a Floating Exchange Rate

Answer 2

• Can be quite volatile, which harms FDI, trade and macroeconomic stability
• Self Correction of the Current Account is unlikely to occur, especially in high inflation

Question 3

What are some of the Evaluation points of a Floating Exchange Rate?

Answer 3

• State of the Wider Economy
• Is the economy developed or developing?
• A managed gives you a mix of both worlds
• Does the exchange rate reflect PPP- Big Mac Index

Question 4

Name 2 Pros of a Fixed Exchange Rate

Answer 4

• Reduces Uncertainty around the Exchange Rate
• There can be some flexibility (the band)
• Can devalue/ revalue relatively easily
• Reduces the Cost of Trade because firms who are uncertain buy future currency, which is more costly
• Encourages domestic firms to increase R&D for international competition

Question 5

Name 2 Cons of a Fixed Exchange Rate

Answer 5

• Seen as politically weak to devalue or revalue
• Using Interest Rates can have nasty macroeconomic implications elsewhere
• The capacity of the Economy. Can they hold large levels of foreign currency?
• Speculative attack if investors think that the value is too low (BLACK WEDNESDAY, 1992)

Question 6

What are some of the Evaluation points of a Fixed Exchange Rate?

Answer 6

• State of the Wider Economy
• Is the economy developed or developing?
• A managed gives you a mix of both worlds

Question 7

Name 2 Pros of being part of a Monetary Union

Answer 7

• Non-Fluctuating Exchange Rate, providing stability
• There is a reduced cost of Currency Conversion, for both Businesses and Consumers
• Higher Business Confidence due to stable Currency
• Currency is unlikely to be attacked by speculation
• Consumers and Businesses can Compare Prices for Regional Indices
• External Tariffs outside the Union protect domestic firms

Question 8

Name 2 Cons of being part of a Monetary Union

Answer 8

• Loss in Monetary Policy autonomy, both IR and MS
• Differing sets of economic needs are not catered for
• Cannot alter Exchange Rate to boost Trade Performance
• Costs of converting to a new Currency are expensive (Croatia and Bulgaria now)
• Nations still have Fiscal autonomy, thus can act fiscally irresponsibly and it becomes the Monetary Union’s responsibility (Greece and Portugal)

Question 9

What are some of the Evaluation points of being part of a Monetary Union?

Answer 9

• What kind of member is this nation?
• How many members?
• State of the UK economy
• Look at case studies- Croatia, but France and Germany notably

Question 10

Name 2 Pros of Free Trade

Answer 10

• Increased Static efficiencies due to better allocation of resources
• Better Standards of Living because Consumers can get better quality and new goods they couldn’t have previously
• Lower Prices because of more competition and greater Economies of Scale experienced
• Encourages geo-political relationships

Question 11

Name 2 Cons of Free Trade

Answer 11

• Nations can exploit other countries
• Domestic industries are often harmed
• Worsening of the Current Account

Question 12

What are some of the Evaluation points of Free Trade?

Answer 12

• Do all countries buy into Free Trade?
• Marshall-Lerner Condition
• Prebisch-Singer Hypothesis and Dutch Disease for nations dependent on primary products
• How much power does the nation have internationally

Question 13

Name 2 Pros of Protectionism

Answer 13

• Protects developing, domestic Industries
• Protects dying, domestic Industries
• Can correct a Trade Deficit
• Tariff revenue can be spent on investment into industry

Question 14

Name 2 Cons of Protectionism

Answer 14

• Tariff Diagram shows a net loss for society
• Can trigger a Trade War in retaliation
• Protectionism can distort a Comparative Advantage
• Might be protecting an inefficient domestic firm

Question 15

What are some Evaluation points of Protectionism?

Answer 15

• What level is the measure set at? How harsh?
• Marshall-Lerner Condition
• Prebisch-Singer Hypothesis and Dutch Disease for nations dependent on primary products
• How much power does the nation have internationally

Question 16

Name 2 Pros of Globalisation

Answer 16

• Greater international trade, and the benefits that come from this (Lower Prices, greater quality, More Raw Materials, More Growth/Development)
• Greater Employment in export sectors
• Growing market size- more EoS
• Free Movement of Labour and Capital (FDI)
• Technological Advancements and Innovations

Question 17

Name 2 Cons of Globalisation

Answer 17

• Growing Income and Wealth Inequality
• Higher Unemployment- Particularly Structural- due to international uncompetitiveness
• Environmental Costs of travelling because of pollution (air and water). Future generations suffer
• Trade imbalances (Look at UK and China, both will be hurt by trade wars and Protectionism)
• Greater Risk of external shocks (GFC 2008)
• Loss of cultural diversity- often harms tourism

Question 18

What are some Evaluation points of Globalisation?

Answer 18

• Type of nation- Developed vs Developing
• The newfound globalised economy causes growth BUT not always development
• Likelihood of Protectionism- is Growth sustainable?

Question 19

Name 2 Pros of Economic Aid

Answer 19

• Humanitarian Aid is good when nations struggle due to natural disasters or wars (Haiti 2011-2021 $13bn)
• Development Aid can be used to achieve development outcomes (Higher education, Better healthcare, higher standard of living, infrastructure)
• Long-Term Loans can get paid back
• Tied Aid boosts exports from the donor
• Commodity Aid increases productivity

Question 20

Name 2 Cons of Economic Aid

Answer 20

• Many developing nations have large levels of Corruption, and won’t have the interest of the majority of the population at heart, increasing inequality
• Aid dependence can lead to little need to innovate
• No statistical correlation between aid and Growth- what’s the point?
• Aid isn’t that common- ‘Aid weariness’ grows
• Countries of interest get aid- not all nations
• Donor Countries can exploit the smaller countries

Question 21

What are some Evaluation points of Economic Aid?

Answer 21

• Level of Economic aid- will the recipient be able to repay the loan
• Type of Economic Aid
• Reason for Economic Aid
• Case studies