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Econ > Theme 4 > Flashcards

Theme 4 Flashcards

1
Q

What is the exchange rate?

A

Price of one currency in another currency

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2
Q

Why do foreign countries demand the British currency?

A
  • if there’s an increase in interest rates as higher rate of return- foreigners invest more money in £s
  • Speculators may anticipate a rise in the £ so value increases
  • Increase in FDI which uses £ to pay for things so demand increases
  • rises in incomes abroad, importing UK goods more
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3
Q

What does the increase in demand for the £ do?

A

It leads to appreciation

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4
Q

Why does supply for £ go up or demand fall?

A
  • fall in interest rates so foreigners move money away from UK as lower rate of return
  • speculators anticipate a fall in the £
  • firms move away for Britain (less FDI)
  • increase in income domestically as demand for imports rise so buy another currency and sell the £ for another currency)
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5
Q

What does a fall in supply of £ lead to?

A

Depreciation

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6
Q

What is a managed exchange rate?

A

exchange rate determined purely by the forces of demand and supply for that currency (no government intervention)

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7
Q

What is a fixed exchange rate?

A

government or central bank holds a large amount of domestic currency and foreign currency reserves to sell and buy when exchange rate needs adjusting

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8
Q

If the £ is strong, what will government do?

A

Government will sell £ to increase foreign supply of good to depreciate the £

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9
Q

What does the government do when £ is weak?

A

Government uses foreign currency to buy £, increasing demand for it, shifting demand from D1 to D2, increasing price, causing it to appreciate

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10
Q

Explain the chain of analysis in an appreciation in the exchange rate

A

Exports becoming more expensive and imports are becoming cheaper increasing demand for imports and since net exports are 2-6% of AD, AD decreases

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11
Q

What does an appreciation in the exchange rate mean for firms producing using imports?

A

Cost of production decreases as imports become cheaper which shifts SRAS to the right, reducing cost push inflation

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12
Q

What does appreciation in the exchange rate mean for exporting industries in the UK?

A

Since exports are more expensive relative to other countries, demand for the, decreases, reducing revenue made from them which means there may be unemployment in exporting industries

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13
Q

Evaluate the effect the appreciation of the exchange rate has.

A

Inflation decreases due to lower AD and more AS, imports are cheaper which improves living standards, PED of exports(if inelastic people will still demand them regardless of price).

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14
Q

Give the chain of analysis on depreciation of the exchange rate

A

Imports become more expensive so demand for them falls, exports are cheaper, more revenue. Increase in net export led growth

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15
Q

What does a depreciation of the exchange rate mean for workers who get their supply from abroad?

A

Costs of production increases as imports become more expensive, shifting SRAS to the left, causing cost-push inflation

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16
Q

Evaluate the points made on the depreciation of the exchange rate

A

Marshall Lerner condition, J-curve, higher inflation, depends on how much exchange rate has risen by, protectionism may limit exports

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17
Q

What is the Marshall Lerner condition?

A

A currency depreciation only corrects the current account deficit if the PED of exports plus the OED of imports is greater than 1

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18
Q

Why may the Marshall-Lerner condition not hold? (J curve)

A

As in the SR, consumers take time to adapt to the new rate and foreigners realise UK exports are cheaper after some time. This means net export demand is inelastic in the SR and business contracts and trade deals may still be in place. J curve shows that CA deficit worsens before it gets better,

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19
Q

What’s the advantage of a floating exchange rate?

A
  • there may be reduced need for currency reserves
  • reduced risk of currency speculation
  • can correct the CA deficit when there is a depreciation
20
Q

Evaluate the advantages of the floating rate

A

Volatility - there’s no guarantee the rate will be stable, reducing certainty meaning less FDI and less trade deals happen if lack of certainty in rates

21
Q

What are the advantages of a fixed exchange rate?

A
  • reduces uncertainty as rate is stable and increases trade deals
  • producers may become more competitive, increase R+D and quality of the product as they cannot rely on market forces to depreciate the pound, so have to find ways to increase demand for the product
22
Q

What are the evaluations of the advantages of a fixed exchange rate?

A
  • large levels of foreign currency reserves are needed
  • may be speculative attacks if rate is set too low or too high
23
Q

What is absolute poverty?

A

Where household income is below necessary level to maintain basic living standards

24
Q

What is relative poverty?

A

A condition where household income is a certain percentage below median incomes

25
Q

What is income?

A

A flow of money derived from factors of production eg rents or wages

26
Q

What is an asset?

A

The total amount of assets a person owns

27
Q

What factors affect whether there is absolute poverty or not?

A
  • the minimum wage of a country
  • natural disasters
  • education and skills
  • corruption
  • economic development
  • government policies on taxation and benefits
  • primary product dependency
  • wage growth
  • war
28
Q

How do natural disasters lead to poverty?

A

floods and earthquakes can cause severe economic disruption and large numbers of fatalities so the FoP deteriorate causing negative economic growth and falling living standards

29
Q

Evaluate natural disasters causing poverty

A
  • depends on intensity of natural disaster
  • depends on how effective country is in responding to
30
Q

How can education and skills cause poverty?

A

Statistically, those with worse off families are less likely to get a high quality education as opposed to those that do

31
Q

How can corruption cause poverty?

A

Living standards tend to be lower in countries with high levels of corruption, business owners may collude to keep prices high and limit spending on R+D and they may even bribe officials into the agreement and keeps profit high for these businesses and wont maximise social welfare and interest

32
Q

Evaluate corruption causing poverty.

A

Depends on strength of government, eg China has endemic corruption problems but has lifted millions out of poverty through export-led growth

33
Q

Give application for corruption causing poverty

A

Norway and Russia have a similar percentage of GDP dependent on oil but poverty is far worse in Russia due to higher levels of corruption

34
Q

How can primary product dependency cause corruption?

A

Primary products are commodities extracted through mining and agricultural products but developing countries tend to heavily rely on exporting primary products and according to Prebisch-Singer hypothesis, over time ToT for primary products declines compared to manufactured products as manufactured goods will only rise in price. As a result, developing countries will be able to import less for a given level of exports, living standards fall and the country is subject to volatility in commodity markets

35
Q

How can government policies on taxation benefits cause poverty?

A

Reductions in disability or single parent benefits can push household income

36
Q

How can wage growth cause poverty?

A

Wages for high-skilled professions have risen but wages for medium skill work barely rise and those at the bottom have faced wage stagnation

37
Q

How can war cause poverty?

A

Destruction and death resulting from war reduces the capital stock and labour force, causing factors of production to deteriorate resulting in negative economic growth and falling living standards. War related injuries will restrict or prevent some people from working leaving them vulnerable to poverty

38
Q

What does the Kuznets curve explain?

A
  • Industrialisation leads to economic development and the main beneficiaries are capitalists
  • Large numbers of workers move from rural to urban areas for increased employment opportunities
  • The state develops the capacity to provide public services and is put under political pressure to redistribute the gains from economic development
  • Mass education improves the skill level of workers. Redistributive tax and spend policies are implemented
39
Q

What is international competitiveness?

A

The ability of a country to produce goods and services of quality and price attractive consumers from abroad

40
Q

What are measures of international competitiveness?

A

Unit labour costs, export prices, GCI(global competitiveness index), and the current account of the balance of payments

41
Q

Does a devaluation/depreciation make a country more internationally competitive?

A

Currency is less costly so yes

42
Q

What are non-wage costs?

A

Pecuniary benefits such as gym membership or company events/outings

43
Q

What are the measures of inequality?

A

Transfer payments, social benefits

44
Q

Which country has the highest income inequality before taxes and transfers have taken place?

A

Italy

45
Q

Which country has had the largest fall in inequality?

A

france

46
Q

Which country has the highest inequality after taxes and transfers have taken place?

A

USA

Econ (4 decks)

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