Trade and Exchange rates Flashcards
Definition of exports
UK produced goods and services sold to foreign buyers that generate an injection of income into the UK circular flow
Definition of Imports
Foreign goods and services bought by UK citizens that result in a leakage of income from the UK circular flow
What is net exports
It is the overall difference between the exports and imports
Can be negative or positive
What happens when exports is bigger than imports
It is a trade surplus and this will cause an net injection of funds into the UK economy
Causes a shift right of the AD curve
What happens when imports in bigger than exports
There is a trade deficit and this will result in a net leakage of funds out the economy
There is a shift left of the AD
What determines the balance of trades
Changes in income
The exchange rate
Relative prices of exports and imports
The quality of the product
Protectionist measures
How does income affect balance of trade
When income rises, more imports are bought as they are normal goods
Changes in UK incomes doesn’t affect exports directly but can slightly as when the UK get richer, so do other countries
What are exchange rates
This is the price of one currency expressed in terms of another
How do exchange rates affect balance of trades
When the exchange has a low value then it is cheap for people to buy our exports but expensive to buy imports
When the exchange rate has a high value the it is expensive to buy our exports but cheap to buy imports
What is it called when a currency loses value
Depreciating
What is it called when a currency gains value
appreciating
How does relative prices of exports and imports affect the balance of trades
The price of goods before the exchange rates affect the demand for them
This is affected by:
Domestic costs
Demand for good
Inflation rate
How does the quality of goods affect balance of trades
The better the quality of goods, the higher demand for the exports
How does protectionist measures affect balance of trades
Countries restrict the amount of imports in the country through tariffs, subsidies, Quotas and domestic regulations
What is the UK’s trade balance
Deficit
What is FDI
Investment from companies in the UK or foreign countries
What are the UK’s top trading partners
US
Germany
Netherlands
China
France
Ireland
Spain
Belgium
Italy
Switzerland
What are the UK’s top exports
Cars
Medical products
Power generators
Financial services
Travel services
What are the UK’s top imports
Cars
Medical products
Clothes
Sound equipment
Travel and transport services
What policy are exchange rates
Monetary policy
How are exchange rates determined
By forces of demand and supply in the foreign exchange market
What causes demand for a currency
Buy exports of that country
Tourists visiting the country
Firms setting up business in the country
Foreign savers using the higher interest rates
Speculators who believe the value of the currency is going to rise
What affects the supply of a currency
UK consumers wish to buy imports
UK individuals visiting other countries as tourists
UK firms wish to set up overseas
UK savers switching to get better interest rates
Speculators believe that the £ will fall
How does the government change exchange rates
Direct intervention - Bank of England buys Pounds with foreign currency or sells Pounds
Indirect Intervention - Bank of England changes its own rate of interest
What do countries do to exchange rates when in a recession
Cause the currency to depreciate
By selling Pounds and reducing interest rates
What do countries do to exchange rates when in a boom
Cause the currency to appreciate
By buying Pounds or increasing interest rates
What are the main causes of exchange rate changes in the short run
Speculation and Sentiment
What are the main causes of exchange rate changes in the long run
Affected by countries international competitiveness, relative productivity rates and inflation rates
what is a floating exchange rate
An exchange rate determined by market forces in the forex
What is a fixed exchange rate
An exchange rate that is determined by the government
