Unit 3 - 2

Question 1

What are the reasons for the trade in services surplus?

Answer 1

1. The UK has a comparative advantage in financial services due to large financial centres
2. Many overseas companies use our banks and insurance companies

Question 2

Why has there been a decline in manufactured goods in the UK?

Answer 2

Been declining due to loss of comparative advantage in several manufacturing industries:

1. Over-valued ER
2. Under I in new equipment
3. Outdated designs
4. Low cost of production in NICs + parts of Europe

Question 3

What does the UK have comparative advantage in?

Answer 3

Industries where unit labour costs are less important in winning sales overseas

1. FINANCIAL SERVICES
2. BIOTECHNOLOGY
3. ELECTRONIC EQUIPMENT
4. FASHION + DESIGN

Question 4

Why does the UK trade with the EU?

Answer 4

1. There are reduced trade barriers due to single market
2. Continued expansion of the EU = enlarged market place
3. Geographically close = lower transport costs
4. Euro within eurozone makes trade easier
5. Consumers have similar tastes

Question 5

What is an exchange rate?

Answer 5

1. Price of a currency in terms of another currency or currencies
2. Can be expressed as the value of one currency against another

Question 6

What are the three exchange rate systems?

Answer 6

1. Floating exchange rate
2. Fixed exchange rate
3. Managed floating system

Question 7

What is the floating exchange rate?

Answer 7

Rate of ER Is determined by Demand and Supply
When demand increases the value increased
When supply increases the value decreases

Question 8

Why does demand increase and supply decrease of £?

Answer 8

1. UK exports are more attractive
2. Foreign companies wish to invest in the UK
3. Speculators, foreign companies and governments wish to hold surplus funds in £

Question 9

What are the advantages of the floating exchange rate?

Answer 9

1. An imbalance in the BoP is automatically corrected - no need for the government to intervene and possibly conflict with other objectives
2. Currency can fall to allow for inflation and restore international competitiveness
3. Less strain on resources

Question 10

What are the disadvantages of the floating exchange rate?

Answer 10

1. Speculators are attracted - meaning they may destabilise the ER market as they are buying and selling so much
2. Uncertainty of ER - firms uncertain of costs, prices and profits - may discourage firms trading - negative effect on output and jobs
3. Decrease in currency can be inflationary

Question 11

What is the fixed exchange rate?

Answer 11

When the ER is pegged against the value of another country and its rate is guaranteed by the government

Question 12

What are advantages of the fixed exchange rate?

Answer 12

1. Removes uncertainty associated with floating exchange rate therefore easier for firms which import or export to plan
2. More important for a country to prevent inflation as cannot reply on decrease of ER to regain competitiveness

Question 13

What are the disadvantages of a fixed exchange rate?

Answer 13

1. Government has to intervene - uses reserves
2. BoP disequilibrium not fixed by floating ER - government may resort to barriers to restrict M and increase prices in domestic markets

Question 14

What are the features of a single market?

Answer 14

1. Free trade area
2. Customs union - common external tariff agreed
3. Single factor market - free movement of resources such as labour and capital

Question 15

What are the advantages of a single market?

Answer 15

1. Removal of trade barriers = more trade
2. EoS have been gained and resources are used more efficiently due to increased market size
3. Increased competition = increased efficiency, innovation and reduced costs
4. Mobility of resources = free to love to where they may be most efficient

Question 16

What are the disadvantages of a single market?

Answer 16

1. Widened disparities between richer and poorer regions on the fringe of Europe due to firms transferring to the prosperous geographical centre of Europe where transport costs are lowest
2. Increase cost of goods outside EU due to CET

Question 17

What are the positive impacts of the EU on the UK?

Answer 17

1. Access to best factors of production
   - designers from Italy
   - machinery from France
2. Easier for firms to trade within the EU
3. EoS as increased size of market = lower costs and therefore lower prices
4. Risk beating EoS as trading in more countries
5. Increased competition as
   - increased efficiency
   - increased choice
   - decreased prices
   - increased innovation

Question 18

What are the negative impacts of the EU on the UK?

Answer 18

1. Increased number of goods from outside the EU due to CET
2. Having CET may protect EU firms from external comp and decrease incentive to maintain or decrease efficiency
3. Small firms have to compete with large business with lower costs
4. Language barriers

Question 19

What is the Common Agricultural Policy?

Answer 19

Policy of the EU that is applied to all farmers in the EU

Aims

• increase farmers productivity
• ensure fair SoL for farmers
• stabilise markets
• guarantee reasonable prices for consumers

Question 20

What are the methods for solving the deficit?

Answer 20

1. Protectionist measures to decrease imports
2. Subsidies UK businesses - decreased demand for imports
3. Increased education and training to increase supply
4. Grants and aid to increase marketing
5. Decrease in Demand, but that creates problems
6. Borrow from IMF if severe
7. Allowing or encourage the £ to fall