trial 2 Flashcards
Explain the effects of the relatively slow recovery in the Eurozone on:
- uk businesses
- uk economy
The EU accounts for a large proportion of the UK’s exports. As a result, this may see a decrease in demand and ultimately profits for uk firms will fall. To ensure firms continue to make profit, some of them may cut some of their costs of production such as labourers, causing unemployment to rise. Due to the lack of employment, aggregate demand within the economy may fall, leading to a negative multiplier effect, which will have a negative impact on businesses due to the decrease in demand.
Uk firms which depend mainly on exports for making profit, may decrease production costs by making workers unemployed, in order to maintain profits. Thus leading to a negative multiplier effect as there will be less spending in the economy.
Uk firms that depend on EU exports for their main source of revenue, may have to cut back on production costs by making workers unemployed. This will have a negative impact on the uk economy as GDP and national income will fall as a result of the decrease in output within the economy.
Due to eu nations in a period of recovery, the demand for uk exports will most likely decrease. This will negatively impact the uk’s balance of payments as its imports will be much higher than their export levels.
Other than the Balance of Trade, describe 3 components of the UK Balance of Payments. 3
Current Account
Trade in services records the value of services traded between countries (1).
Investment income/net primary income shows the net interest, profits and dividends between the UK and other countries (1).
Current transfers/net secondary income shows government and private transfers between the UK and other countries/items such as overseas development aid (1).
Capital/Financial Account
The transfer of ownership of fixed assets (1).
FDI, eg investment in land, premises and equipment
by UK companies setting up branches overseas and
vice versa (1).
Portfolio investment shows flows of money between
countries to buy stocks and shares overseas (1).
Other investment eg ‘hot money’ (1).
Describe how demand and supply for sterling can automatically correct a deficit in the UK’s Current Account of the Balance of Payments
If demand for £ falls, its price will fall/weaken. (1)
A weak price for Sterling makes exports relatively cheap/
imports relatively expensive. (1) This is because it costs less in terms of another currency to buy sterling. (1 development mark)
Cheaper exports means demand for UK exports increases/ dearer imports means demand for imports falls.
(1 development mark)
As exports rise and imports fall the deficit is corrected. (1 development mark)
Sterling is traded freely according to the forces of demand and supply when there is a floating exchange rate. (1 development mark)
A deficit on the Balance of Payments shows that less £ are being demanded than are being supplied.
(1 development mark)
Credit use of an appropriate diagram. (1 development mark)
Describe the components of the current account of the UK Balance of Payments.
Trade in goods ie exports and imports of goods. (1 mark) In the UK this is currently in deficit. (1 development mark)
Trade in services ie exports and imports of services. (1 mark) In the UK this is currently in surplus.
(1 development mark)
Investment income ie interest/profits/dividends. (1 mark)
Transfers ie when money moves without any product in exchange. (1 mark) for example aid payments towards international institutions eg EU, IMF etc.
(1 mark)
Describe 4 items included in the UK’s balance of payments.
Current account
• Trade in goods, which is the value of exports minus the value of imports of goods (1).
• Trade in services, which is the value of exports minus the value of imports of services (1).
• Investment income/net primary income, for example, interest/profits/dividends (1).
• T ransfers/net secondary income, for example, overseas development aid (1).
Capital/Financial Account
This is the transfer of ownership of fixed assets (1).
Foreign direct investment, for example, land and capital (1).
Portfolio investment in stocks and shares (1).
Other investment, for example, ‘hot money’ (1).
Reserve assets, for example, foreign currency managed by the Bank of England (1).
• Balancing item — net errors and omissions (1).
Explain the impact of multinationals locating in Scotland on the UK’s balance of payments.
Multinationals (MNcs) represent an increase in foreign direct investment (FDI) (ID), which boosts flows into the financial account
- MNCs produce goods for export (ID), improving current account balance (EXP) (1) and may also produce goods domestically that no longer need to be imported (DEV) (1).
- MNCs import raw materials (ID) worsening current account balance (EXP) (1).
- MNCs may repatriate profits (ID), worsening the investment account/current account balance (EXP) (1).
- MNCs may relocate workers who send remittances home (ID), which reduces net primary income (EXP) (1).
Describe the role of the European Central Bank (ECB) within the Eurozone. 3 marks
The European Central Bank (ECB) is responsible for setting monetary policy throughout the Eurozone. Member states set their national budgets within agreed limits for deficit and debt, and determine their own structural policies involving labour, pensions and capital markets. Each country retains its own central bank but they do not have power over monetary policy. The ECB is in charge of setting a common interest rate for the Eurozone. The objective of this is to achieve price stability.
Characteristics of Developing Countries
Low GDP per capita, meaning average person will be very poor perhaps living off a dollar a day, low levels of consumer spending in the circular flow of income. Also meaning low government tax revenue
Low saving rates - savings rates are low because the gdp per capita is low, all income is spent on food and shelter.
Reliance on primary production (cash crops)
Dependence on one or two exports
Poor infrastructure (roads, ports, public & merit goods)
Lack of industrial capital (machinery, ICT etc.)
Lack of investment from MNE & the domestic economy
Corrupt & unstable governments
Education levels - low literacy rate
Explain ways in which developed economies can provide economic assistance to developing economics (types of aid)
Capital aid (ID) to enable productivity improvements/ greater output. (1) This can be either directly with equipment or by loans/grants. (1 development mark) Examples include, providing equipment, infrastructure, drainage etc. (1 development mark)
Technical aid (ID) to enable better use of equipment etc. (1) Eg giving advice and training to local workers on the best way to use equipment. (1 development mark)
Educational aid (ID) to improve literacy/basic education. (1)
Health aid (ID) to improve health of workers. (1) Eg medicines and inoculations
Food aid (ID) to ensure working population is fit to work. (1) However this can lead to dependency/lack of self- sufficiency)
