Macro hot topics

Question 1

Which countries are suffering depreciation

Answer 1

Turkey
Argentina
UK
and then also India, japan, sri lanka and pakistan

Question 2

Effects of capital flight in turkey

Answer 2

• Lira lost about a quater of its value against the dollar since ballot so exports became more comp
• depreciation could reduce size of CAD and imports get more $$$
• BUT quickened pace of lira declines and tightening of monetary policy and fiscal policy could slow internal demand

Question 3

Monetary policy in turkey 2024

Answer 3

March 2024
- CB raised IR 5 percentage point to 50% and will be held there till deterioration in inflation is seen
- why? cool runaway inflation and halt capital flights
- inflation high due to 49% NMW raise, rising costs of imports from slumping lira
- total amount turkish residents holding in foreign currency banks has risen $122bn
- savers concerned central bank will allow lira to fall more freely

Question 4

turkey currency crisis facts

Answer 4

• during month of elections, tukey faced signifcant capital flight
• BOP data showed that net omission (mystery outflows) reached over $7.4bn accounting for whole turkey CAD almost
• gap in CAD is $7.9bn and turks had to rely on reserves to finance ballooning gap so reserves decline $17bn

Question 5

UK depreciation of 2022

Answer 5

• mainly bc announcement of big tax cuts in mini budget
• but also bc of strength of the dollar due to US cb aggressively raising rates and US less exposed to high energy prices caussed by russia ukraine crisis which uk csn do nothing about

Question 6

Turkey in 2021

Answer 6

• For instance, Turkey’s currency is worth about 40% less against the US dollar than last year after traders were spooked by a rise in annual inflation to more than 70%.

Question 7

effects of depreciation

Answer 7

• A sudden and sharp drop in sterling creates uncertainty, throwing the plans of UK businesses that import and export goods into disarray
• weak pound increases price of imports e.g oil, a key comodity import so diesel and petrol $$, uk imports 50% of its food
• UK assets are now cheaper so foreign investors may go on a spending spree
• ## floating currency so not really a long term issue

Question 8

what was wrong with the mini budget of 2022

Answer 8

• tax cuts funded by higher gov borrowing will increase demand pull inflation and pledges to further cut taxes worsened fears
• investors were scared borrowing would not bc recovered through higher growth and greater tax rev so debt would acc worsen
• hence large pound sell offs when mini budget announces and pound plundged to $1.04 the lowest level the pound has ever been against the dollar and yield (interest) on 10 year bonds rose to 4%

Question 9

Why is argentine peso depreciating

Answer 9

• many thought peso was overvalued and would depreciate overtime but the speed at which it plunged against dollar was unexpected.
• due to investor concerns about ability to control infalton and hikes in the US IR which made dollar stronger
• argentinas dollar debt became more expensive as a result so they had to get a $50bn IMF loan
  SO…
  Javier milei devalued the peso by more than 50% dec 2023. WHY - cut countries fiscal deficit and bring down soaring triple digit inflation
• inflation was close to 150% dec 2023
• 2/5 of the country in poverty

Question 10

Reasons for collapse of argentinina economy

Answer 10

1) inflation; populist government printed money to finance wide budget deficits alongside big depreciation has caused inflation
2) foreign currency; billions of $ of foreign currency reserves sold to protetc the peso and 45% hike in IR to respond to rapid depreciation and inflation
3) economy activity; worst drought in decades cut soybean and corn harvest (backbone of arg economy), driesing up tax rev and caused recession

Question 11

Croatia

Answer 11

• adopted the euro in jan 2023
• recent decline in popularity of monetary independence (haveing ones own floating currency)
• originally having a falling currency can offset negative shocks by boosting exports but it can also make people poorer as imports get $$
• ECB focused on monetary tightening to reign in inflation and eastern european countries outside EU have been even more vulnerbale to inflation

Question 12

advantage of monetary union

Answer 12

• highlighted in europe energy prices
• slovakia part of EU but not its neighbours czech republic and poland
• all three face similarly high inflation but ECB 2.5% IR is lower than the other two (nearly three times higher)
• digital euro in exploration process
• trade is streamlined with neede

Question 13

cons of monetary union

Answer 13

• policy recklessness of one country can cause collapse of the union and the currency
• many people though it would be italy with high debt and low growth but last summer it was UK with their mini budget
• many croatians fear they will feel effects of poverty once join EU due to difference in salaries
• loss of independent monertary policy
• needs a consolidated banking system evidence by 2010 eurozone debt crisis

Question 14

pros of monetary union

Answer 14

• Lower transaction costs for firms and consumers. evaluation – only a small % of firms turnover
• Greater certainty for firms investing in capacity to export to Europe. May also encourage inward investment. evaluation – firms already reduce risk by hedging against exchange rate movements
• Greater Price Transparency – easier to check different prices in same currency
• Incentives. Greater pressure to increase productivity and keep inflation low, otherwise become uncompetitive. (so increase in comp)
• Encourage inward investment. Foreign firms keen to invest in Eurozone area

Question 15

Cons of joining the eurozone monetrary union

Answer 15

• loss of independent monetary policy
• loss of ability to depreciate currency in recession
• Growth and stability pact limits expansionary fiscal policy in the recession. In theory, the growth and stability pact limits the amount of government borrowing, therefore making it harder to escape recession
• No Lender of Last Resort. In the Euro, the ECB is unwilling to act as lender of last resort. bc greater pressure on govt bond yields and puts pressure on countries to pursue austerity (spending cuts) which create lower economic growth
• Can’t leave. Greece experienced great financial hardship in Euro, with a drastic recession. However, the costs of leaving the Euro were too high, and they had to accept stringent spending cuts and conditions from Europe to receive a partial bailout. This also damaged feelings of national pride and democracy as the government had little influence over economic policy

Question 16

Why does the eurozone have a growth and stability pact

Answer 16

• The EU’s response to the fiscal crisis is to make stronger treaty legislation to penalise countries who have deficits which are too big. - But, spending cuts can push economies into recession. Austerity policies of 2011-14 were a factor in prolonging the recession in southern Europe.
• Evaluation: However, countries tend to ignore growth and stability pact when necessary

Question 17

expand on the con “loss of independent monetary policy”

Answer 17

• In the Euro, there is no option to devalue.
• If you have higher inflation than other European countries (e.g. higher wage growth, lower productivity growth) you will soon become uncompetitive.
• This has been a major problem for European countries such as Greece, Spain and Portugal. (PIGS) There decline in competitiveness has led to lower exports and lower economic growth, contributing to their decline in tax revenues.
• From 2008-10, the UK benefited from a 20% devaluation in sterling which helped to restore competitiveness. Without this devaluation, the recession could have been worse.
  Evaluation: However, depreciating currency could cause loss of confidence in investing in the UK. Depreciation causes uncertainty.

Question 18

Expand on the “loss of independent monetary policy”

Answer 18

• In the Euro, interest rates are set by ECB but may be inappropriate for UK economy.
• For example, the 2008 recession hit the UK harder than other European countries because of our exposure to the financial sector.
• The ECB increased interest rates earlier than in the UK. This could have pushed the UK into a double-dip recession.
• Evaluation: Nature of UK housing market (many have large variable mortgages) means people are sensitive to changes in interest rates. Therefore, since interest rates are too high it could cause a more serious recession

Question 19

UK joined trans pacific trade partnership: pros

Answer 19

• TPP is an indopacific bloc
• greater access to a market of over 500 million
• reduced tariffs on imports = cheaper prices of highh quality products like fruit juices from chile and peru, honey and choc from mexico
• greater uk competitiveness - Tariffs of around 80% will be eliminated on UK exports of whisky within 10 years and tariffs of 30% on UK exports of cars will be eliminated within 7 years, helping the UK get a larger share of the market
• The UK is the world’s second largest services provider and services accounted for 45% of our trade with CPTPP members last year. Joining the agreement can reduce red tap
• greater investment
• new markets; UK will have an FTA with malaysia for the first rime

Question 20

What is the CPTPP

Answer 20

The CPTPP is a free-trade agreement (FTA) between 11 countries around the Pacific Rim: Canada, Mexico, Peru, Chile, New Zealand, Australia, Brunei, Singapore, Malaysia, Vietnam and Japan
- aka the transpacific partnership
- remember to refer to mark scheme on patterns of trade for africa trade bloc macro paper 2 in 18/19

Question 21

Why might recent terms fo trade shocks have occurred

Answer 21

• for manye developed countries:
• rising costs of imported goods especially essential imports or gas and oil causes the index of import prices to rise creating a deterioration
• but in 2023 A sharper fall in imported energy prices, stronger growth in wages and profits, and revisions to outturn data have delivered a faster-than-expected recovery in the UK’s terms of trade (the price of UK exports relative to imports). We now forecast the terms of trade only slightly below levels seen prior to Russia’s invasion of Ukraine over the next five years

Question 22

Which three banks collpased recently

Answer 22

• silicon valley bank, first republic and credit suisse

Question 23

What is being proposed to control TNC transfer pricing

Answer 23

• global minimum corporationtax rate of 15% has been committed to by 140+ countries and starts from 2024
• why - prevent a race to bottom whereby countries keep lowering tax regimes or offer tax incentives to attract inward invest,ent and multinational move income and profits to these low tax jurisdictions, reducing twhir overall tax liabilities

Question 24

arguments for global min corp tax

Answer 24

aka why is transfer pricing bad
- concerns among tax authorities that they may be losing out on significant tax revenues, and among the public that multinational corporations are not paying their fair share of taxes.
- transfer pricing can also be used to distort trade patterns and investment decisions,
- negative implications for the overall efficiency and competitiveness of the global economy.
- encourages tax avoidance and evasion so tax abse is reduced
- govs are running fiscal deficits and growing national debts esp from pandemic, need more revenue
- development consequences: 60% of capital flight estomated from african countries is due to TNC transfer pricing so less dev funds
- race to bottom: game theory
- issues of equity and fairness es when tax burden is increasing on households
- THESE ARE ALL ARGUMENTS FRO DEGLOBALISATION

Question 26

unemployment, inactivity rates in the uk

Answer 26

• Northeast: 3.6%, 26.9%
• london: 4.4%
• south east: 4.0%, 18.4%
• UK overall 4.2%, 22.2% !!!!

unemployment on left, inactivity on the right

Question 27

difference between unemployment and inactivity

Answer 27

working age dont have a job and looking for a job
vs working age dont have a job and not looking for a job

Question 28

evaluation for unemployment

Answer 28

• regional variations
• duration of joblessness (is it frictional or logn term)
• variation by age, gender, ethnicitiy/ education background

Question 29

causes of structual unemployment

Answer 29

• occupational immobility; pattern of labour demand chaanges e.g workers facign challengees and costs of retraining such as people made redundant in heavy manufacturing due to rise of AI
• employment barriers; disincentive in the tax and welfare system e.g ver high effective marginal tax rate if they take a low paid job so unemployment trap

Question 30

keynesian policy to increase employment in an economy

Answer 30

• increase deficit funde governmentn spending on infrastructure projetcs such as roads, bridges hospitals
• new ob opps in construction but also AD stimulatedsnd ca lead to positive multiplier efect on biz investment

Question 31

free market neo liberal approach to increasing employment

Answer 31

• encourage flexible labour markets by minimizing hiring and firing restrictions
• reforming labour laws to make it easier to adjust workfoce based on market demand eg zero hours contratcs
• so just market based SSPs

Question 32

ideas to reduce labour shortages in construction

Answer 32

• hgiher skilled worker visa quotas
• tax incentives such as lower NICS for construction companies taking on apprentices
• tax incentives for investment in modern methods of construction