Steedsy Theme 4

Question 1

What is the definition of the balance of payments

Answer 1

Shows the record of all outflows and inflows of money

Question 2

What are the UK’s main exporting goods

Answer 2

Cars
Power generators
Pharmaceutical products
Crude oil

Question 3

What does the financial account include

Answer 3

Net balance of FDI inflows
Hot money
Changes to value of gold and foreign currency

Question 4

Structural reasons for surpluses and deficits of the current account

Answer 4

Uneven distribution of natural resources
Differential in competitiveness
Investment and long term economic growth
Domestic and government spending

Question 5

Cyclical reasons for surpluses and deficits of the current account

Answer 5

Exchange rates
Inflation

Question 6

Negatives of a current account deficit

Answer 6

• Net outflow of AD from circular flow
• Loss of jobs in export sectors and industries affected by rising imports
• Fall in foreign exchange revenues as price of pound decreases due to less supply of money in uk economy as your money is now in another economy due to the import increase
• debt burden - people will stop buying bonds due to uncertainty over whether they will be paid back or not
• reduced quality of life due to lack of economic growth and exchange rate weakness

Question 7

Causes of importing too much (deficit)

Answer 7

Elasticity of demand for imports (high mpm)
Decline of manufacturing
Growth of emerging markets
Lack of competitive pricing

Question 8

Does a balance of payments deficit matter

Answer 8

• Partial auto-correction - higher demand for imports causing inflation leading to more exports
• investment and supply side
• the financial account is positive

Question 9

why does it matter if there is a balance of payments deficit

Answer 9

loss of output and employment
money flowing out and problems financing the debt

Question 10

what are expenditure switching policies

Answer 10

Expenditure-switching policies aim to switch consumer spending towards domestic goods, and away from imports. Reducing the growth of the supply of money in an economy can be expenditure- reducing or expenditure-switching.

Question 11

examples of expenditure switching policies

Answer 11

exchange rate policies (to deprecate pound)
protectionism

Question 12

how do exhcange rates policies impact the deficit and what are the methods of changing exchange rates

Answer 12

they use methods which depreciate the value of the pound to make exports cheaper. this is done by:
lowering interest rates (SPICED)
increasing the supply of pounds which is done by increasing the demand for foreign currency which increases the supply of pounds for UK, lowering the price

Question 13

evaluate the exchange rate methods to depreciate the pound

Answer 13

evaluating:
- lower interest rates - time lag; lowering interest rates can cause inflation leading to lower demand for domestic goods; magnitude of interest rate change; liquidity trap
- increasing the supply of pounds - only so much foreign currency to buy so can take a while

Question 14

methods of protectionism

Answer 14

embargo (ban)
tarrifs
red tape
tax
quota (physical limit)
import duty

Question 15

evaluate protectionism

Answer 15

retaliation
difficult to administer

Question 16

what is the difference between expenditure switching and expenditure reducing policies

Answer 16

Expenditure-reducing policies aim to reduce demand in the economy, so spending on imports fall. Expenditure-switching policies aim to switch consumer spending towards domestic goods, and away from imports. Reducing the growth of the supply of money in an economy can be expenditure- reducing or expenditure-switching.

Question 17

What would you use to increase international competitiveness and state examples of this policiy

Answer 17

Only use supply side policies as they improve quality, lower prices and attract FDI
Subsidies
Gov spending on education (more productive) and infrastructure
Lower corporation tax
Less spending on unemployment benefits
Deregulation
Lower/ freeze min wage

Question 18

What is the marshall lerner condition

Answer 18

The marshall lerner condition is satisfied of the absolute sum of a countries export and import elasticities is greater than 1 (elastic)

Question 19

Examples of deficit removal policies (of exports and imports)

Answer 19

Exchange rate policies (WPIDEC)
Protectionism (increasing prices of imports to encourage demand for exports)
Government investment in domestic industries (subsides increase supply so decrease prices of exports)
Deflationary policy (lower prices make exports more competitive)
Supply side policies (such as subsidies)

Question 20

how does tight fiscal affect the balance of payments

Answer 20

less disposable income to be able to be spent on imports
Possibly lowering the price of exports which would improve it further

Question 21

evaluate using tight fiscal policy to improve the balance of payments

Answer 21

magnitude of the price drop
confidence
price is not the only determinant of exports e.g quality
marshall-lerner condition
Conflict of objectives

Question 22

evaluate using tight monetary policy to affect the balance of payments

Answer 22

imports may increase due to spiced
time lag
liquidity trap
narshall lerner condition

Question 23

methods of supply side policy used to reduce a trade deficit

Answer 23

lower corperation tax
removing red tape so more productive
privatisation
investment in healthcare and education
reduce welfare payments

Question 24

how will government investment in domestic industry improve the trade deficit

Answer 24

to make exports cheaper
to replace imports

Question 25

examples of expenditure reducing policies

Answer 25

contractionary monetary and fiscal the priority is reducing imports if there is significant disinflation, may lead to an increase in exports as more competitive

Question 26

evaluate using expenditure reducing policies to reduce the trade deficit

Answer 26

could cause a recession or deflation conflict of objectives depends on elasticity of demand for imports

Question 27

does it matter if there is a current account deficit

Answer 27

depends on what the percentage deificit is compared to real gdp if the percentage of deificit of gdp is greater than percentage growth then it isn’t sustainable so would be a priority

Question 28

what should you talk about if there is a question on improivng international competitiveness

Answer 28

if there is a question on improving international competitiveness only talk about supply-side policy as this lowers the price of uk goods

Question 29

why do some countires have a trade surplus

Answer 29

export orientated growth FDI under valued exchange rate high domestic savings - banks have more money to lend

Question 30

what are the demand side causes of a trade surplus

Answer 30

weak excange rate high incomes abroad low inomes domestically

Question 31

supply side causes of a trade surplus

Answer 31

low relative inflation lower labour costs (high productivity, low min wage) strong investment new resource discoveries

Question 32

consequences of a trade surplus

Answer 32

financial account deficit appreciation of exchange rate higher (x-m)) means higher AD so inflation

Question 33

what is a shut down point

Answer 33

A shutdown point is a level of operations at which a company experiences no benefit for continuing operations and therefore decides to shut down temporarily—or in some cases permanently. It results from the combination of output and price where the company earns just enough revenue to cover its total variable costs.

Question 34

what are the different types of exchange rates

Answer 34

spot exchange rate - the rate for a currency at todays market prices forward exchange rate - a forward ate involves the delivery of a currency at a specified time in the future at an agreed rate bi-lateral exhcange rate - the rate at which one currency can be traded against another

Question 35

When demand for another currency increases, what happens to the supply of pounds

Answer 35

When demand for another currency increases, the supply of the pound will increase

Question 36

What are the factors affecting exchange rates

Answer 36

Trade balances Foreign direct investment Portfolio investment Interest rate differentials

Question 37

What is competitive depreciation

Answer 37

Buying and selling currency

Question 38

Advantages of using a floating exchange rate

Answer 38

Stability in the balance of payments Market efficiency enhances Foreign exchange is unrstricted - currences can be traded without restrictions Useful instrument for economic adjustment Imoirt inflation protected - if it was fixed, countries face the problem of importing inflation through surpluses of the balance of payments or higher prices of imports

Question 39

Fixed exchange rate advantages

Answer 39

• Trade and investment - less currency risk, overseas investors will be more confident to get a return on their investments as the pound wont fluctuate • some flexibility permitted • reductions in the costs of currency hedging- businesses have to spend less on currency hedging inf currency is stable

Question 40

what is hedging

Answer 40

securing the price now for future exchanges (to get rid of any uncertainty)

Question 41

drawbacks of a fixed exchange rate

Answer 41

• risk of over-valued exhcange rate leading to deflation and a reduction in economic growth • can lead to permanent imbalance in current account • reduced freedom to use interest rates

Question 42

what is managed floating

Answer 42

this is wen the central bank may choose to intervene in the foreign exchang markets to alter the exchange rate

Question 43

reasons for managed floating

Answer 43

• improve the balance of trade • reduce the risk of deflationary recession - becuase exports demand increases the domestic price level by making imports more expensive • to rebalance the economy • appreciation of currency • or to reduce prices of imported capital and tech

Question 44

methods to cause a depreciation of the pound

Answer 44

QE so the money supply increases reduce interest rates to cause hot money outflows sell home currency and buy foreign currency to depreciate the pound (as demand for pound decreases)

Question 45

methods to appreciate the value of the pound

Answer 45

reduce taxes on income from assets to attract overseas investors to buy the currency raise interest rates buy home currency, sell foreign currency

Question 46

what are the limits to central bank intervention to mnage a currencies value

Answer 46

requires large scale foreign exchange reserves changing interest rates conflicts with othher macro objectives j curve marshall - lerner condition

Question 47

what are the factors affecting international competitiveness

Answer 47

exchange rates productivity quality wage and non-wage costs research and development taxation - lower corporation tax to encourage investment

Question 48

what are the benefits of being internationally competitive

Answer 48

current account surplus employment and economic growth wage growth higher domestic purchasing power international investment

Question 49

problems of sustaining competitiveness

Answer 49

trade barriers current account surplus leads to appreciating exchange rate other rising domestic costs

Question 50

policies that woud be used to increase international competitiveness

Answer 50

supply side policies tight monetary (to lower inflation) or lowering interest rates (for exchange rates) tight fiscal - to lower inflation

Question 51

what are the top 4 Uk expenditures on

Answer 51

1 - social protection £341bn 2 - health £245bn 3 - education - £131bn 4 - DEBT INTEREST - £116bn

Question 52

what 3 things does government spending have an impact on

Answer 52

• productivity - investment on education and healthcare makes workers more efficient; subsidies means better equipment and tech; transport, less time wasted. • growth and employment - subsidies mean higher supply so lower prices leading to an increase in consumption • living standads and equality- better healthcare, welfare payments

Question 53

Explain crowding out

Answer 53

Increased government spending If there is large government spending it will have to sell debt to the private sector. To encourage consumers to buy the bonds they may require higher interest rates. Therefore less private investment and consumption Eventually government spending needs to be funded by higher taxes to squeeze in spending further.

Question 54

Evaluate crowding out

Answer 54

Supply of loanable funds is not limited to domestic sources Strong multiplier value Fiscal deficits crowd in private sector investment

Question 55

Why is the uk debt sustainable

Answer 55

Bank of England owns majority of bonds Interest rates are very low so servicing it is easier for the government Finance available abroad (foreign investors buy government bonds)

Question 56

To what extent is a rise in national debt a concern

Answer 56

Higher taxes so lower economic growth in the long run Crowding out Higher chance of government defaulting on payments so could decrease confidence

Question 57

What are automatic stabilisers

Answer 57

Government spending and taxes change as the economy moves through stages of the trade cycle. E.g less tax revenue during a recession. E.g during a boom there will be less spending on unemployment benefits

Question 58

What is discretionary fiscal policy

Answer 58

Deliberate manipulation of variables to influence the economy.

Question 59

What is cyclical fiscal balance

Answer 59

The size of the fiscal deficit is influenced by the state of the economy. In a boom, tax receipts are high and spending on unemployment benefits is low

Question 60

What is structural fiscal balance

Answer 60

The part that is related to the economy (boom or recession)

Question 61

Causes of fiscal deficits

Answer 61

Increase in interest rates on debt Increase in inactivity leading to a rise in welfare benefit spending Recession causing rising unemployment Decrease in consumer spending Demographic factors such as an ageing population

Question 62

what is external debt

Answer 62

debt owed by the government, businesses and people of a country to overseas lenders such as banks

Question 63

what are the three types of tax and define them

Answer 63

progressive tax - as income rises tax rises proportional tax - marginal rate of tax is constant leading to a constant average rate of tax regressive tax - tax rate paid falls as incomes rise

Question 64

what is fiscal drag

Answer 64

when tax brackerts dont increase in line with inflation or income, causing people to pay more tax, drags into higer tax brackets

Question 65

what is the likely impact of an increase in protectioonism on the global economy

Answer 65

• Higher prices for consumers, especially on goods/services that can't be produced domestically, e.g. bananas in the UK, increasing inflation globally • Higher prices for consumers due to domestic firms facing less competition from abroad • Less choice for consumers as imports become too expensive • Fewer firms may decide to export due to increased cost/bureaucracy to abide by, reducing global competition and therefore lower global GDP, higher global inflation • Reduction in comparative advantage globally leading to less productivity and less output

Question 66

why may tax revenue fall if tax increases

Answer 66

• increase in tax reducing the incentive to work • increase tax reducing the incentive to spend in the economy • increased incentive to tax avoid/evade

Question 67

evaluate the laffer curve

Answer 67

• tax cuts could lead to workers taking more leisure time and working less so less tax revenue (backwards bending labour supply curve) • lower top rate taxes might increase income inequality

Question 68

what happens to imports if tax increase

Answer 68

if tax increase imports decrease as prices lower in uk

Question 69

how would lower tax rates affect FDI

Answer 69

some countries encourage FDI investment by lowering taxes such as corporation tax to incentivise firms to set up in these countries

Question 70

what are the problems with sustained government debt and borrowing

Answer 70

• interest payments on the debt • increase in taxes to pay off the debts • less capital available to spend on investment into the economy (opportunity cost) • crowding out • potential negative impact on exchange rates - less confidence in gov paying back debt means less investment into economy so depreciation of exchange rate • confidence is reduced

Question 71

methods to reduce government debt

Answer 71

• spending cuts • raise taxes • privatisation • expansionary policicies • depreciation policies

Question 72

evaluate whether national debt is actually a concern

Answer 72

depends on the cost of annual debt interest payments depends on the ability of the government to attract investors to buy new debt could be due to a servere external shock it is rational to borrow to invest when market bond yields are low

Question 73

advantages of using quantitative easing

Answer 73

extra tool of monetary policy can lead to a depreciation of the exchange rate can increase confidence

Question 74

evalute QE

Answer 74

liquidity trap can create zombie companies inflation could lead to housing and wealth inequality which worsens geographical mobility

Question 75

state the aims of supply side policies

Answer 75

improve inentives to work increase productivity encourage start ups promote contestability and innovation increase capital investment

Question 76

criticisms of market based supply-side policies

Answer 76

income inequality - tax cuts that primarily benefit high income earners underinvestment in public goods such as infrastructure financial instability - e.g due to deregulation

Question 77

what are the limits to the governments ability to control global companies

Answer 77

corruption - to influence politicians tax avoidance - done via transfer pricing power of the firm to achieve economies of scale so less revenues for frims and lower wages paid

Question 78

problems facing policy makers when applying policies

Answer 78

innacurate information inability to control external shocks

Question 79

what is transfer pricing

Answer 79

Transfer pricing is a legal technique used by large businesses to move profits around from parent companies to subsidiaries and affiliates to ensure funds are evenly distributed. However, many multinational corporations use it as a tactic to lower their tax burdens

Question 80

positives of a floating exchange rate

Answer 80

Monetary Policy Independence: Floating exchange rates allow central banks to focus on domestic economic conditions like inflation and unemployment without being constrained by exchange rate targets. Automatic Adjustment: The exchange rate automatically adjusts to changes in supply and demand for a country's currency, helping to maintain balance of payments equilibrium. Import Inflation Protection: When a currency appreciates , imports become relatively cheaper, which can help to offset the effects of imported inflation.

Question 81

evaluate using a floating exchange rate

Answer 81

volatility which reduces incentives for FDI into domestic economy

Question 82

positives of fixed exchange rate

Answer 82

decreased exchange rate uncertainty so increased FDI reduced need for hedging (buying at a certain exchange rate for a product in the future) which is an extra cost - so reduced cost of trade

Question 83

evaluate using a fixed exchange rate

Answer 83

interest rates used to keep it at a fixed level will have effects on economy risk of over/under valuation which damages bofpayments

Question 84

evaluate raising taxes to reduce inflation

Answer 84

reduces quality of life/increase level of poverty

Question 85

what is the financial sector

Answer 85

The financial sector is the part of the economy made up of firms and institutions that provide financial services to commercial and retail customers. This sector comprises a broad range of industries including banks, investment companies, insurance companies, and real estate firms.

Question 86

Discuss the role of the financial sector in the growth and development of developing countries.

Answer 86

• facilitating saving so banks have more funds for lending, facilitating investment and therefore growth • promoting lending to enable more investment in the economy • exchanging currencies- enabling firms to imports parts and materials- often more cheaply- and also enabling them to export - helping to increase size of their market • providing a market for equities • Harrod-Domar model • Microfinance • Central banks/international organisations

Question 87

Examples of market orientated strategies to stimulate development in an LIC

Answer 87

Privatization: Shifting state-owned enterprises to private ownership can increase efficiency and competitiveness. Deregulation: Removing or loosening regulations can lead to greater competition and innovation. Attract FDI Floating Exchange Rates: Allowing currency values to be determined by market forces can facilitate trade and investment. Competition: Encouraging competition among businesses can lead to higher quality products, lower prices, and greater innovation. Free Trade: Openness to international trade can promote economic growth by allowing businesses to access larger markets and lower costs. Microfinance: Providing small loans and financial services to low-income individuals and businesses can promote entrepreneurship and economic development.

Question 88

Micro and macro effects of a currency depreciation

Answer 88

Micro - higher import prices = higher costs for firms importing raw materials leading to less profits Macro - more price competitive to export demand increases. Eval: if demand increases then price will increase again in the long term. Macro - cost push inflation (lower supply on AS diagram) Macro - pro longed currency depreciation will cause decreased confidence in the economy leading to less FDI