4.1.8 and 4.1.9 Flashcards
Summary of depreciation in Exchange rate
Tends to increase rate of economic growth and reduce unemployment
Tend to benefit exporters, but makes imports more expensive
Cause inflation because:
-imports more expensive
- higher domestic demand
- firms have less incentive to cut costs
Improves the current account deficit
How exchange rate improves the BoP: Value of exports increase
Goods and services become cheaper to abroad markets and in turn should become more competitive
How exchange rate improves the BoP: Value of imports fall
More expensive for the domestic consumers so they will decrease their spending on imported, abroad goods and focus on more domestic goods
International Competitiveness
Degree of which a country can compete internationally in those markets and whilst maintaining and expanding real incomes of its citizens
Price Competition
How cheaply a country can produce and provide a good or service
Non- Price Competition
Product Quality
Innovation
Design
Reliability and Performance
Floating Exchange Rate
Determined by the forces
of supply and demand.
Fixed Exchange Rate
Set by the government who maintain the value at this price
If the price of the £ increases then the government will supply more £ to buy the foreign currency, so reducing the exchange rate
Managed Exchange Rate
Combine the characteristics of fixed and floating exchange rate systems.The currency fluctuates but the
central bank of the country buys and sells currencies to try and influence their exchange rate.
Reasons to choose a Floating Currency
Reduce need for foreign currency reserves
Freedom to set policy interest rates to meet domestic objectives
Help prevent imported inflation
Insulation for an economy after an external shock especially for export- dependent countries
Reasons for a Fixed Currency
Certainty of currency value gives confidence for investment
Reduced costs of currency hedging for business
Stability helps control inflation
Can lead to lower borrowing costs
Imposes responsibility on gov policies
Less speculation if the fixed exchange rate is credible
How the Government Support/ Manage the Exchange rate
Foreign exchange reserves- use foreign exchange held by the central bank to buy sterling
Borrowing, borrow foreign currency from abroad to buy sterling
Raise interest rates to encourage money to flow into the country
Use fiscal policy to reduce AD and therefore reduce demand for imports
Improve the supply side of economy to make country more competitive
Measuring Competitiveness
Relative export prices
Productivity
Measuring Competitiveness: Relative export prices:
This is the ratio of one country’s exports prices relative to another country, and it’s expressed as an index. The lower the relative export price, the more competitive the country.
Measuring Competitiveness: Productivity
Productivity is the measure of output per input. The most common measure would be labour productivity. The unit labour cost is how much labour costs per unit of output.
