Theme 4

Question 1

What are the limitations of HDI?

Answer 1

LIMITATIONS

• ignores qualitative factors e.g. democracy, quality of education or human rights for example
• ignores other measures ranging from gender equity, proportion of workforce in agriculture
• ignores income distribution- inequality- solved by IHDI

Question 2

How many direct effects does an appreciation or depreciation of a currency have?

Answer 2

APPRECIATION OR DEPRECIATION of currency has ONLY 2 AFFECTS on CURRENT ACCOUNT balance of payments (affect imports and affect on exports)

Question 3

What must you remember about the Marshall Lerner condition and the J-curve affect?

Answer 3

NOTE- MARSHALL LERNER condition AND J-CURVE EFFECT can occur for an APPRECIATION as well as for a depreciation

Question 4

How could you evaluate an appreciation of a currency causing a worsening of the current account on the balance of payments?

Answer 4

• May change in the long term- an appreciation will tend to reduce inflation (less cost push inflation as imports cheaper)- this can make UK goods more competitive (as lower production costs)-> stronger exports in the long term … could-> improvement of current account
• Currency may not have appreciated against all currencies
• Currency may have appreciated against currencies of countries who do not receive many exports from that country … not effected
• Magnitude discussion- size of appreciation or depreciation
• Non-price factors may be more important- e.g. price changes may not be as important as quality
• Impact on current account depends on elasticity of demand- If demand for imports and exports inelastic, then current account could even improve (Marshall lerner condition- states that when SUM OF PED OF IMPORTS AND EXPORTS MORE ELASTIC OR GREATER THAN 1 WILL LEAD TO INTENDED OR EXPECTED IMPACT OF APPRECIATION OR DEPRECIATION- i.e intended impact for appreciation is worsening of current account and for depreciation it is the improvement)- REMEMBER key laws about elasticity and change in revenue depending on price- Exports are more expensive, but if demand is inelastic, there will only be a small fall in demand. The value of exports will increase. If demand for exports is price elastic, there will be a proportionately greater fall in export demand, and there will be a fall in the value of exports.
• Marshall condition and J-curve effect- Often in the short term, demand is inelastic (hence why J-curve effect is seen- short term improvement with an appreciation or deterioration with depreciation) BUT over time people become more price sensitive and also fixed term contracts end AND … demand more elastic (… Marshall Lerner condition achieved and intended or expected effect of appreciation or depreciation is seen). It also depends on what goods you export. Some goods with little competition will be inelastic.

Question 5

What are the effects of increased protectionism?

Answer 5

• When talking about FISCAL policy talk about BOTH government spending AND taxation
• REMEMBER EUROZONE countries tend to have HIGH NATIONAL DEBT (… may not be able to afford government spending- rely on loans- long term impacts for future generations OR TAX CUTS), include countries such as Spain and Greece … export holidays which may have inelastic demand as can only be offered by these countries, export food, oil, cars etc some of which could have inelastic demand as well
• REMEMBER- a more skilled workforce = a more productive workforce
• REMEBER the comparative advantage being artificially eroded due to protectionism will LEAD TO LESS OUTPUT AND LOWER LIVING STANDARDS
• For PROTECTIONISM OR TARIFFS questions, DRAW A TARIFF DIAGRAM AND ANALYSE
• REMEMBER- protectionism means country’s exports less internationally competitive-> domestic industries suffering-> potentially domestic unemployment- add to already high Zambian unemployment (potential for a a on a developing country)- may lead to forced retaliation to protect domestic employment
• ASSOCIATE protectionism e.g. tariffs with increased inflation as imported goods more expensive- cost push inflation- further makes exports less internationally competitive as cost of production increases

Question 6

How would you evaluate protectionism?

Answer 6

• Depends on the type of protectionism. Quotas might be compared/contrasted with tariffs, for example
• Depends on whether the country is in a trade bloc or is exporting to trade blocs- if it is in trading bloc then less affected by protectionism
• Extent of the country’s dependency on world trade
• Extent of increase in protectionism for the particular country
• After the recession the protectionism might start to fall again, or comparison with the 1930s protectionism after the Great Depression- ONLY short term to protect domestic employment and industries
• Consequences e.g. retaliation