15 Exchange Rate Systems and Economic Growth and Development Flashcards
(241 cards)
1
Q
Why is foreign currency in derived demand?
A
We need to buy it to access foreign goods and services markets.
2
Q
What is an exchange rate?
A
The external price of a currency, usually measured against another country.
3
Q
What does the exchange rate measure?
A
How much of another currency a particular currency can buy.
4
Q
Are all exchange rates in terms of another currency?
A
No; some are measured against gold, or against a weighted average of a ‘basket’ of currencies.
5
Q
Where are currencies bought?
A
On the FOREX market.
6
Q
What are the features of the FOREX market?
A
As close to perfect competition as is achievable: 1. 24 hour trading 2. Many buyers and sellers 3. Homogenous products 4. Near perfect information.
7
Q
In the UK, how are exchange rates normally expressed?
A
A ratio between 1GBP:x foreign currency, where x is the amount of a foreign currency 1GBP will buy.
8
Q
What is currency appreciation?
A
A strengthening of the currency, meaning the GBP can buy a larger quantity of a foreign currency.
9
Q
What is depreciation?
A
Where the domestic currency can buy a smaller quantity of a foreign currency.
10
Q
If the exchange rate is 1GBP:$1.5, what would $1 be worth in terms of GBP?
A
GBP0.67.
11
Q
What are the macro effects of a falling exchange rate?
A
- Worsened balance of payments on the current account 2. Imported cost-push inflation.
12
Q
What is the relationship between interest rates and exchange rates?
A
A higher interest rate is likely to cause an exchange rate appreciation as hot money flows enter the country seeking the highest rate of return on investment.
13
Q
Most exchange rates today are expressed in terms of what?
A
The dollar, the world’s reserve currency.
14
Q
How have exchange rates changed in how they are expressed?
A
Before 1914 - most expressed in terms of gold. Only after 1945 did the dollar become the world reserve currency.
15
Q
What exchange rate is often seen since Brexit?
A
The GBP:Euro exchange rate, since the EU remains our main trading partner.
16
Q
What is the Sterling Exchange Rate Index (ERI)?
A
It does not measure the pound’s external value against a particular currency, but rather it is a trade-weighted average of the pound’s exchange rate against a number of leading trading currencies.
17
Q
How has the ERI changed in recent years?
A
Shift away from Euro due to slightly reduced post-Brexit trade with the EU.
18
Q
What are nominal exchange rates?
A
Exchange rates listed on the FOREX markets, which do not take account of distortions such as inflation.
19
Q
What is the real exchange rate?
A
The weighted average value of a country’s currency relative to a basket of other major currencies, adjusted for the effects of inflation.
20
Q
What can a real exchange rate formula measure?
A
How price competitive, in real terms, our exports are.
21
Q
What is the spectrum of intervention on exchange rates?
A
Most competitive: 1. Freely floating 2. Dirty floating 3. Adjustable peg 4. Rigidly fixed.
22
Q
What is a freely floating exchange rate?
A
Cleanly/purely floating exchange rates.
23
Q
What is a managed exchange rate?
A
Where the government intervenes in the FOREX market to alter the value of its currency.
24
Q
What are the 3 main types of managed exchange rates?
A
- Dirty floating exchange rates 2. Adjustable peg exchange rates 3. Rigidly fixed exchange rate.
25
What is an adjustable peg exchange rate?
Resembles a rigidly fixed exchange rate, but the peg is changed from time to time.
26
What is devaluation?
A formal depreciation of an adjustable peg/rigidly fixed exchange rate.
27
With an adjustable peg system, what is usually allowed?
A band within which the exchange rate is permitted to fluctuate.
28
What determines the exchange rate in a freely floating system?
The interplay of demand for and supply of the currency.
29
How to write the price axis in an exchange rate diagram?
P(currency X:currency Y) - Price of currency X in terms of currency Y.
30
What could distort the exchange rate by hot money flows?
Relative interest rates - a change in the rest of the world can cause an impact.
31
What are 5 things that can increase the demand for a freely floating currency?
1. Increase in relative interest rates 2. Speculation anticipating a rise in the GBP 3. Increase in inward FDI 4. Rise in national income from abroad 5. Increase in competitiveness.
32
Who are FOREX traders?
Individuals who trade into currencies they speculate will rise in value and vice versa, seeking to make a market-period profit.
33
What does it mean when an increase in competitiveness can increase the exchange rate?
A rise in UK export competitiveness will increase export demand, driving FOREX demand to the right.
34
What are 4 things that can cause a currency to depreciate?
1. Decrease in interest rate 2. Speculators anticipate a fall in the pound 3. Firms offshoring 4. Increase in domestic incomes.
35
What does the supply of the pound imply?
British agents sell, causing supply to increase.
36
What is the assumption about a rise in incomes leading to exchange rate depreciation?
Assumes that we see domestic produce as an inferior good and that we hence have a sizeable MPM.
37
To support a fixed exchange rate, what must the government or central bank hold?
Large amounts of currency reserves.
38
Why does a central bank keep currency reserves despite having no current liabilities?
To back up the currency in event of a depreciation.
39
What is an example of when currency reserves were not enough to prevent depreciation?
UK ERM.
40
What is a key fact about central bank currency reserves?
1. Some must be domestic such that supply can be increased by selling them in 2. Some must be foreign so that the currency can be bought up and demand affected.
41
What do factors that cause appreciation generally relate to?
Determinants of demand.
42
What do factors that cause depreciation generally relate to?
Determinants of supply.
43
How can we undermine the view that the FOREX markets are perfectly competitive?
One market mover (the central bank or government) has market making power in terms of buying/selling currency when an exchange rate is fixed.
44
How to show government intervention in FOREX markets?
1. When the domestic currency is overvalued, the central bank needs to sell its currency reserves of the domestic currency reserve into the FOREX market. HENCE THE RESULT IS A SUPPLY SHIFT RIGHT. 2. When the domestic currency is undervalued, the central bank needs to buy up the currency to increase its demand. HENCE THE RESULT IS A DEMAND SHIFT RIGHT.
45
What does devalue mean?
Forced depreciation.
46
What does revalue mean?
Forced appreciation.
47
What may a government on a fixed exchange rate facing import-push inflation do?
Revalue the currency.
48
What may a government on a fixed exchange rate facing a bad (X-M) do?
Devalue the currency.
49
How else could governments manipulate the exchange rate beyond currency reserves and evaluation?
Interest rate manipulation.
50
What is a risk of interest rate manipulation?
Unintended consequences/conflict of macro objectives.
51
How could we revalue a currency using interest rates?
Raise them, to attract hot money flows.
52
What does SPICED stand for?
Strong Pound: Imports Cheap Exports Dear.
53
What are 2 effects of an appreciation as per SPICED?
1. SRA will shift right, reducing cost-push inflation, because firms have reduced import costs. 2. AD will shift left, reducing demand-pull inflation, because net export demand falls.
54
What are 3 downsides of an appreciation?
1. Lower growth due to reduced AD, negative multiplier and reduced accelerator. 2. Cyclical unemployment in export-dominant industries such as manufacturing. 3. Higher unemployment in domestic industries due to negative multiplier of above and also because of increased price competition with imports.
55
What are 3 benefits of an appreciation?
1. Lower cost-push and demand-pull inflation. 2. Cheaper imports may improve living standards, particularly if a technology transfer occurs. 3. Potential efficiency gains for domestic producers may result from increased competitive pressure.
56
How could increased price competition from an appreciation benefit consumers?
Lower prices due to reduced X-inefficiency could lead to a gain of consumer surplus.
57
What are the impacts of a depreciation?
Weak pound: Imports Dear Exports Cheap.
58
How to illustrate the effect of a depreciation?
1. AD/AS diagram with AD shifting right, increased inflationary pressure. 2. AD/AS diagram with SRAS shifting left, AD stays the same.
59
What are 2 pros of a depreciation?
1. Increased employment in exporting industries. 2. Increased employment in domestic industries due to multiplier of the above but also due to reduced competitiveness of imports.
60
What is a major con of a depreciation?
Inflation risk, both DP and CP.
61
What are the diagrams for an appreciation/depreciation?
1. AD/AS with an AD shift. 2. AD/AS with an SRAS shift.
62
What are key evaluation points for how much AD shifts when there is an appreciation/depreciation?
1. Proportion of economy which is export industries can affect how much AD shifts. 2. PED of imports and exports (Marshall-Lerner/J-Curve). 3. Extent of change in the exchange rate. 4. Protectionism.
63
What are 5 reasons governments may wish to intervene in FOREX markets?
1. Depreciating the exchange rate can boost employment. 2. Increasing the exchange rate can fight inflation. 3. Seeking stability to improve trade competitiveness. 4. Weak XR may help the current account. 5. Maintain a fixed exchange rate in a common market e.g. ERM.
64
Why is exchange rate manipulation particularly effective against inflation?
Both demand-pull and cost-push inflation are likely to be affected.
65
What are 2 ways governments can influence FOREX markets?
1. Buy or sell from currency reserves 2. Change interest rates.
66
How can interest rates affect exchange rates?
Hot money flows.
67
What does PPP stand for?
Purchasing Power Parity.
68
Why is PPP necessary?
Distortions and volatility of market exchange rate.
69
If a basket of goods in the UK is 1000 and in the US it is 1600, what does this imply about PPP?
Yes, reflects PPP.
70
What does purchasing power parity mean?
A given amount of currency in one currency will be able to buy exactly the same quantity of goods and services in another currency.
71
If a basket is 1000 in the UK and 1700 in the US, what does this imply about the exchange rate?
This is not a PPP exchange rate; the purchasing power of our currency reduces when we convert it through the floating exchange rate.
72
According to PPP, when is the nominal exchange rate undervalued?
The domestic currency can buy less in real terms when used to buy the same goods and services in the US.
73
What is the real exchange rate used for?
PPP.
74
What does the real exchange rate internalize?
Changes in costs and prices.
75
In theory, how does a nominal/PPP deviation self-correct?
Consumers in one country realize their currency is over-valued and seek to buy products in the other country, increasing supply of the currency and causing a depreciation.
76
What are reasons PPP is not achieved by FOREX?
1. Speculative flows and distortions are very significant. 2. Imports are not directly price competitive due to additional inherent costs.
77
What is the Big Mac index?
A 1986 PPP tool created by the Economist that compares the price of a Big Mac in the USA to that in other countries.
78
What does a US big mac cost on the Big Mac index?
1.
79
What does a Chinese big mac likely cost on the Big Mac index?
Cost less than 1 due to weak renminbi.
80
What are key facts about the Big Mac index in 2025?
1. US - baseline at $5.69 2. Switzerland at $8.07 - overvalued franc due to hot money flows 3. Average in BRICS much lower e.g. in South Africa $2.85.
81
What will an American who goes to China with enough money for 1 big mac in the US be able to buy?
Significantly more in China due to Big Mac Index.
82
Why is the Big Mac Index limited?
Only one good/service under consideration so prone to cost factors for that particular good/service.
83
For most countries, what is the most important factor of the current account deficit?
A balance of trade deficit.
84
What are the effects of a large current account deficit on the exchange rate?
1. Causes repeated depreciations, because domestic consumers are selling the pound to buy imports. 2. This causes WIDEC. Therefore, import demand decreases and export demand increases.
85
Why might the current account NOT self-correct?
1. Imports and exports not price elastic in demand. 2. Speculation is now dominant over trade on determination of the exchange rate.
86
What are 5 advantages of a floating exchange rate?
1. Reduced need for currency reserves. 2. Freedom of domestic monetary policy. 3. Useful instrument for macroeconomic adjustment. 4. Partial automatic correction for a trade deficit. 5. Reduced risk of currency speculation.
87
What is an example of how a freely floating exchange rate can increase freedom of domestic monetary policy?
September 1992 and Black Wednesday - interest rates hit 11%.
88
What are the advantages of a floating exchange rate?
1. Reduced need for currency reserves
2. Freedom of domestic monetary policy
3. Useful instrument for macroeconomic adjustment
4. Partial automatic correction for a trade deficit
5. Reduced risk of currency speculation
89
How does a floating exchange rate reduce the need for currency reserves?
No need to influence currency via FOREX intervention, meaning reduced opportunity cost of government spending on building currency reserves.
90
How can a floating exchange rate be a useful tool for macroeconomic control?
1. Current account stabilisation
2. Helps export driven economies
91
How can a floating exchange rate reduce the risk of currency speculation?
Investors cannot short the currency/bet against or for a change in the peg.
92
What are the cons of a floating exchange rate?
1. Volatility is likely
2. Speculation still does occur, and is more rabid because there is no certainty.
93
What are the advantages of a fixed exchange rate?
1. Uncertainty down
2. Some flexibility permitted
3. Reductions in the cost of trade
4. Discipline on domestic producers
94
What is the effect of volatile floating exchange rates?
Can reduce investment by TNCs because it reduces export certainty.
95
What is a problem with a fixed exchange rate?
1. Interest rate and conflict of macro objectives
2. Large levels of FOREX reserves required
3. Speculative attacks
96
What is a speculative attack?
When speculators on the FOREX market attempt to force the government to adjust its peg for a fixed exchange rate, usually by selling reserves of the currency which the government is forced to buy.
97
What is the Marshall-Lerner condition?
A depreciation can only correct a current account deficit if the following condition holds: PED (Exports) + PED (Imports) > 1.
98
How does the Marshall-Lerner condition work?
1. When PED for exports is inelastic, a currency depreciation has a less than proportionate impact on quantity of export demand.
2. When PED for imports is inelastic, a currency depreciation has a less than proportionate reduction in imports.
99
What happens if PED(x-m) < 1?
A currency depreciation can worsen the current account deficit.
100
What happens if PED(x-m) > 1?
1. Net export PED is elastic
2. A fall in the price of net exports due to a currency depreciation is likely to lead to an increase in total revenue from export sales.
101
What is the cause of the J-curve?
It takes time for consumers to adapt to a currency depreciation.
102
What is the central assumption of FOREX markets?
That currencies are traded in derived demand for goods and services.
103
How can speculators influence exchange rates?
When a currency is perceived to be undervalued, they buy them to make a capital gain selling them when they valuate in the future.
104
What is hot money speculation?
Speculation that occurs when investors move capital in and out of countries to take advantage of interest rate differentials.
105
How can a floating exchange rate safeguard against import inflation?
If inflation rates are higher in the rest of the world, the floating exchange rate can appreciate, lowering the price of imports.
106
What is monetary sovereignty?
The independent monetary policy which is possible when we have a floating exchange rate.
107
What are the two macro objectives satisfied by freely floating exchange rates?
1. Achieving a satisfactory current account equilibrium
2. Cost-push inflation, to a certain extent.
108
What happens to a fixed exchange rate if a country pursues high levels of fiscal expansionism?
Downward pressure will be placed on the exchange rate because the balance of payments will deteriorate.
109
What are the benefits of fixed exchange rates?
1. Certainty and stability
2. Anti-inflationary discipline on the domestic economy.
110
What are the cons of fixed exchange rates?
1. Credibility issues
2. Over-valued leading to deflationary pressures.
111
What is a ceiling in exchange rates?
Maximum value to which the exchange rate is allowed to rise.
112
What is a floor in exchange rates?
Minimum value to which the exchange rate is allowed to fall.
113
What is the band of flexibility in fixed exchange rates?
The range between the ceiling and the floor of the fixed exchange rate.
114
What are two benefits of fixed exchange rates?
1. Certainty and stability
2. Anti-inflationary discipline on the domestic economy - no scapegoating of import prices.
115
What are seven cons of fixed exchange rates?
1. Credibility
2. Over-valued -> deflationary
3. Under-valued -> inflationary
4. Monetary policy dependency
5. BOP crises can occur in countries whose currency is overvalued
6. Currency reserves have a high opportunity cost
7. Misallocation of resources from bad valuation.
116
How can credibility undermine a fixed exchange rate?
If speculators view a fixed exchange rate as unrealistic, they will bet against it.
117
What is exchange equalisation?
Buying and selling of currencies to maintain a fixed exchange rate.
118
What are two ways to manage a fixed exchange rate?
1. Exchange equalisation - buy and sell the currency
2. Interest rate adjustment.
119
How can the Bank of England adjust the interest rate to maintain a fixed exchange rate?
Changes in interest rate can attract hot money flows as well as adjust consumer spending on imports/exports.
120
Are fixed exchange rates common and why?
No - countries need to sacrifice domestic monetary policy.
121
Which countries use fixed exchange rates?
Around 30 left, including Denmark against the Euro and Latin American countries against the Dollar.
122
Why are adjustable pegs considered an acceptable half-way house?
1. Remove the potential for speculation
2. Gain benefits of certainty for business.
## Footnote
However, changing too often undermines certainty.
123
What is an example of an adjustable peg devaluation?
1967 Sterling devaluation.
124
When might the government carry out an adjustable peg devaluation?
When it is persistently supporting the currency or when the opportunity cost to the domestic economy is too high.
125
Does the UK have a freely floating currency?
Yes to a certain extent, but the Bank of England admits to carrying out a 'smoothing operation' to remove temporary fluctuations.
126
What are two reasons a country might devalue the currency in an adjustable peg system?
1. Reduce a current account deficit
2. Stimulate economic growth.
127
What is the history of the ERM?
Set up by the EU in 1979, the UK joined in 1990.
128
What are three reasons the ERM was deliberately overvalued?
1. Designed to reduce domestic inflation.
2. Improve UK export competitiveness by forcing firms to become more cost-efficient.
3. National pride - Thatcher agreed this not long before Tory Party conference in 1990.
129
What is a classic example of a conflict of macro objectives created by a fixed exchange rate?
The Bank of England raised the interest rate in 1992 to attract hot money flows to sustain the currency, leading to a deep recession.
130
What evidence suggests ERM devaluation was necessary?
1. 53% increase in exports 1992-97
2. 15.2% growth.
131
How does modern monetary policy take its legacy from post-1992?
The Bank of England pursued loose monetary policy since it did not need to back up the exchange rate anymore.
132
How big was the depreciation in 2008 and why?
$2 to $1.3 as hot money flows sought safety in secure currencies.
133
What evidence shows that devaluation of the currency does not always work due to hot money flows?
Post-2008, the current account deficit remained high, with only a slow recovery caused by the devaluation.
134
What evidence indicates that exchange rate fluctuations can be due to factors beyond domestic control?
In 2022, the pound lost 10% against the dollar due to hot money flows seeking safety.
135
Why did the devaluations of 2008 and 2016 worsen conditions for consumers?
1. Globalisation - many UK firms were charging in foreign currencies.
2. Lack of available domestic substitutes means import inflation is the main cost.
136
What are three examples of currency unions?
1. GBP in the UK
2. Euro in the Eurozone
3. US dollar.
137
What is another name for a currency union?
Monetary union.
138
How many initial members were in the Eurozone?
12 members.
139
What was the significance of the 1985 Single European Act?
It established the single market.
140
What did the 1992 Maastricht Treaty do?
Put the countries on a path to monetary union.
141
What are two reasons for the Euro?
1. It had become a business cost to exchange currencies for international purchases.
2. Exchange rate fluctuations influenced exchange rates in unfair ways.
142
What are optimal currency areas?
Areas suitable for becoming single currency areas.
143
What makes a currency area optimal, and why is this a problem for the Eurozone?
1. Mobility of labour and other factors of production
2. Common fiscal policy.
## Footnote
The EU only has the former.
144
Why is the mobility of labour a problem in the Eurozone?
Mobility is necessary for competitiveness, but the EU lacks high internal migration rates due to language and cultural barriers.
145
Why is a common fiscal policy important to an optimal currency area?
Without it, less competitive areas will lack investment to become competitive.
146
Why did many EU countries rack up debt?
1. Capital markets more accepting of Euro denominated debt.
2. Need to keep competitive with richer countries.
147
What is the evaluation of capital mobility in the EU?
Yes, it exists. There was significant capital movement from the core to the periphery before 2007.
148
What is the overall evaluation of optimal currency areas worldwide?
1. Must have substantial mobility to make up for differences in competitiveness.
2. Must have a common fiscal policy for transfer payments.
## Footnote
Only the USA and UK satisfy this.
149
Simply speaking, why was there a Eurozone crisis?
The Eurozone is not an optimal currency area.
150
When will a freely floating exchange rate eliminate a trade deficit or surplus?
Whenever capital flows and hot money flows are insignificant.
151
What is the difference between economic growth and economic development?
Growth - increase in the value of real national output.
Development - increase in quality and contribution to human happiness.
152
What is an example of how economic growth and economic development are not the same?
In a military dictatorship, growth may enforce a repressive order despite high levels of inequality.
153
What is the difference between sustainable and sustained growth?
Sustainable implies it could go on forever, while sustained growth has inter-temporal opportunity costs.
154
What system do we use to characterize LEDCs?
W.W. Rostow's theory.
155
What are the four stages of the Rostow model?
1. Traditional societies
2. Traditional economies preparing for take off
3. Economies in self-sustaining growth
4. Economies can allocate resources.
156
What are traditional societies?
Societies predominantly agricultural, lacking in development.
157
What are 'traditional economies preparing for take-off'?
Next stage above a traditional society, more productive with some preconditions of successful growth.
158
What is self-sustaining growth?
After take-off, a move from agricultural to industrial society with increased output.
159
What is the final stage of Rostow's model?
Countries are fully grown and can allocate resources to maximize social welfare.
160
How can we use a PPF to illustrate decisions taken by a growing economy?
More likely to use capital goods than consumer goods.
161
What are indicators of development?
Things we can use to measure how developed a country is.
162
What is the evaluation of GDP per capita for developing countries?
GDP > GNI due to outflows and interest payments. Though the significance of remittances should not be understated.
163
What is HDI?
A composite index developed by the UN to overcome the shortfalls of using GNI/GDP data alone.
164
What are the components of HDI?
1. Life expectancy at birth
2. Mean years of schooling
3. Expected years of schooling
4. GNI per head of population.
165
What is the HDI range?
Max 1, Min 0.
166
What are the 2025 HDI facts?
1. Switzerland first with 0.967
2. UK has 0.940
3. Somalia has lowest with 0.380.
167
What is the limit of HDI and how was it overcome?
Does not concern inequality; in 2010, UN introduced Inequality-adjusted HDI.
168
Who famously criticized GNP for excluding quality of life factors?
Robert Kennedy.
169
What are the two main factors affecting growth and development?
1. Rate of technological progress
2. Investment in capital goods.
170
What is the difference between education and training?
Education - learning for learning's sake; Training - learning to improve productivity.
171
What are five barriers to growth and development?
1. Corruption
2. Institutional factors
3. Infrastructure
4. Inadequate human capital
5. Lack of property rights.
172
How can corruption stifle growth and development?
Misallocation of resources and productive inefficiency from higher costs.
173
How could we illustrate the cost of corruption on firms?
Higher ATC curve - productive inefficiency.
174
What are institutional factors?
How compatible an economy is with the rules of free market capitalism.
175
What is an example of an institutional factor that varies between countries?
1. Efficient financial regulation
2. Reliability of the financial sector.
176
What is the law of contract?
The obligation to fulfill contractual agreements by law.
177
How does a lack of infrastructure affect development?
It holds development back as firms cannot be price competitive.
178
How could we evaluate the idea that a lack of infrastructure holds development back?
1. Public sector must drive infrastructure investment.
2. Creative destruction may reduce infrastructure as a barrier.
179
How can human capital constrain development?
Without adequate training, the stock of human capital is likely to be low.
180
How is human capital important to both growth and development?
More human capital improves productivity and innovation.
181
What are property rights?
The exclusive right to determine how an asset or resource is used.
182
How can clearly defined property rights aid development?
1. Essential to investment and confidence.
2. State ownership might be beneficial in command economies.
183
Can state ownership of property rights help growth and development?
Potentially, but it can create oligarchies if property rights are assigned privately.
184
What is sustainable development?
Development with no opportunity cost in terms of welfare for future generations.
185
What is a key evaluation on growth policies regarding development?
The increase in externalities can jeopardize sustainable development.
186
What are two uses of microeconomics in growth and development?
1. Reduce market failures.
2. Improve income distribution equity.
187
What counter-evaluation do some economists mention regarding redistributive fiscal policy?
Risk to incentives needed for growth.
188
What major debate exists in the argument over growth and development?
State vs free market as the main driving force.
189
What is capital flight?
The sudden withdrawal of money and assets from a country.
190
What is a key argument for government intervention in development?
To prevent capital flight.
191
What is an example of capital flight?
Ruling elites of a developing dictatorship move their savings overseas.
192
What are three facts about recent capital flight?
1. Particularly bad in sub-Saharan Africa.
2. Trillions of dollars in the last 4 decades.
3. Worsened since 2000.
193
Why is capital flight a potential disadvantage of globalization?
It is likely when MNCs invest in LEDCs.
194
What is the debate between aid and trade?
Whether trade or aid is more significant in promoting international economic development.
195
What is aid?
Money, goods, and services given by one country or multilateral institutions to another.
196
Who can provide aid?
1. Governments
2. Multilateral institutions
3. NGOs.
197
What is the free market view of trade vs aid?
International specialization and free trade benefit all participants.
198
What is Ha-Joon Chang's view on free trade vs aid?
Aid is more important than free trade due to the advantages of developed countries.
199
Free market view of trade vs aid?
International specialisation and complete free trade, in line with the principle of comparative advantage, benefits all participants.
200
Ha-Joon Chang view on free trade vs aid?
Aid > free trade
## Footnote
1. Governments in developed world support free trade because they have a comparative and competitive advantage in key industries.
2. When developing nations catch up with them, they 'pull up the drawbridge' and claim that cheap labour costs etc. are unethical. They introduce superfluous regulation to maintain their dominance.
3. Technology transfers, a key determinant of globalisation, are restricted in the name of property rights, with rich countries arguing that LEDCs are undermining legal patents.
201
3 counter-evals to strategic theory of trade?
1. Free trade has hugely increased in recent decades - protectionism still peripheral.
2. Not just about North-South trade - trade amongst LEDCs is also vital for growth and development. PTAs such as Bangladesh-Bhutan PTA 2020.
3. Trade can build up domestic industries because countries must invest in order to trade. Unlike aid, it cannot be appropriated for corrupt uses.
202
6 types of aid
1. Military aid.
2. Hard loan - hard currency loan with market interest rates - actually aid?
3. Soft loan - sub-market rate loan, long maturity date etc.
4. Disaster relief.
5. Tied aid - HYPOTHECATED aid on exports - really aid?
6. Lending expertise.
203
Eval of disaster relief aid?
1. 'Sticking plaster' - only helps crisis and not underlying growth and development.
2. Mostly NGOs.
204
Eval on the idea that disaster relief aid is mostly NGOs?
Whilst DEC (Disasters Emergency Committee) pledged to support the humanitarian crisis in Afghanistan in 2021, the government pledged to match every pound donated with a pound of taxpayer money.
205
Example of how aid can sometimes be about benefitting the aiding country?
China - Belt and Road initiative - lent their experts but ultimately about securing cheap imported raw materials including cobalt.
206
What fundamental argument could be made in an essay regarding trade and development?
Neither trade nor aid are done benevolently. Countries expect a return.
207
Key argument that aid is ineffective?
TYPES of aid - technology transfers often granted to developing countries are well beyond the means of that country. For example, high-tech capital equipment given to an LEDC is useless unless human capital is sufficient to use it and, in particular, to repair it when it breaks down.
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4 limitations of aid?
1. Conflict of interest, with donors prioritised over residents.
2. Market distortions - firms motivated by aid, not consumer sovereignty.
3. Corruption.
4. Aid dependency.
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Who theorised about aid dependency?
Dambisa Moyo, an African economist.
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Which argument against aid suggests that governments will have little incentive to improve?
Aid dependency.
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Savings gap
Low levels of savings in LEDCs:
1. Reduces potential for taxation.
2. Reduces consumer investment in capital goods.
Aid can fill this gap.
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Effect of interest rates on XR?
Lower interest rates will reduce demand for the currency from hot money flows, leading to a depreciation, potentially worsening CP inflation or making exports more price competitive.
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3 key advantages of floating XRs?
1. Balance of trade under control.
2. No need for currency reserves.
3. Monetary sovereignty.
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MONETARY TRILEMMA
The macroeconomic law that fixed exchange rates, perfect capital mobility and independent monetary policy are mutually exclusive.
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How can a floating XR worsen uncertainty?
Puts off FDI and hence NEGATIVE MULTIPLIER.
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What is the effect of a freely floating XR on inflation?
1. A depreciation may worsen cost-push inflation if there are not domestic substitutes for imported goods.
2. Less macro discipline needed by governments. If inflation differs between countries, the currency will depreciate, so domestic inflation is mitigated.
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How to illustrate import cost-push inflation?
Exchange rate diagram and AD/AS with AS shifting left.
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What is the effect of lower interest rates on the value of the currency?
Currency depreciates, ceteris paribus.
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UK trade deals since Brexit?
39, including a special deal where goods which meet EU origin requirements can trade into the single market without the CET (PTA, NOT ALL GOODS to prevent leakage into single market).
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4 ongoing trade talks?
1. USA - Trump.
2. India.
3. EU.
4. Gulf Cooperation Council.
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When do banks first appear in the Rostow model of development?
Second stage - "traditional economies preparing for take off"
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How could we criticise Rostow's model?
Simplistic - does not account for exogenous influences e.g. FDI
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Show why a country in early stages of economic development would focus on capital investment rather than consumer goods/services.
PPF with capital on y-axis and consumer goods/services on x-axis. Positioning towards capital causes curve to shift outwards
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Four ranks of HDI?
Very high, high, medium and low human development
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How is GNP different to GNI?
GNP takes the output approach, including of factors of production owned overseas
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Illustrate how economic growth can occur without economic development
A PPF where the PPF shifts outwards, but we move down the axis such that more armaments are made with fewer units of education
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Education vs training
Training is for a job
Education is for intellect
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How are education and training a key determinant of development?
A well-educated population is more likely to be able to engage in productive economic activity
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Explain why a country with a low savings ratio and limited access to finance will struggle to achieve economic growth
1. If the Government taxes and then injects this tax into the circular flow of income, it is likely that the final effect on national income will be very limited since they taxed it from the national income flow in the first place
2. Without access to finance, the government will be constrained in its ability to borrow to finance growth
The same is true for private investment in capital markets
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Example of how corruption can cause barriers to growth?
Higher costs and X-inefficiency created by mandatory payments to corrupt officials, for instance, can increase a businesses average costs. The incidence of this cost may be shifted to consumers in the form of a higher price
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Key thing with Chapter 15 questions and example?
Synoptic links can be made
E.g. Might make a link with corruption to ATC curve
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How can a lack of infrastructure discourage FDI?
This cost must be borne by firms, effectively a barrier to entry
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Example of how infrastructure requirements for development can fall due to creative destruction?
Invention of the mobile phone
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Sustainable development
Defined by the OECD as "development that lasts"
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When thinking about policies to promote growth and development, it is best to refer...
To the classic monetary and fiscal policies
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Example of a debate about fiscal policy and development?
1. Should the government tax heavily and develop or leave it to the private sector?
2. Would progressive taxes discourage enterprise or would excessive income inequality represent a less optimal development outcome regardless?
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When evaluating whether governments or the private sector would be more effective at achieving growth, a key area to evaluate could be...
CAPITAL FLIGHT - capital controls could mitigate this, but this could discourage FDI because it reduces the potential for repatriation of profits
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Example of Ha-Joon Chang's argument?
USMCA instead of NAFTA, 2020
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How was the trade vs aid argument played out in the real world?
Some economists pointed out that Asia had grown faster on trade and not aid since capital investment had occured
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Strategic trade theorists would generally recommend that LEDCs should...
Pursue protectionism until domestic industries are well enough developed to compete internationally
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