Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

Alevelllll > Balance Of Payments, Exchange Rates, International Competitiveness, Poverty And Inequality > Flashcards

Balance Of Payments, Exchange Rates, International Competitiveness, Poverty And Inequality Flashcards

(60 cards)

Start Studying
1
Q

Structural factors influencing a country’s current account balance

A

SSP

Under-investment in capital equipments and export infrastructure

Low productivity- increase CoP, increase price

Persistently high relative inflation, low competitiveness

Slow R&D and innovation

Emergence of lower cost competition

Brexit- increased paperwork

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Cyclical factors influencing a country’s current account balance

A

AD related- Demand side policies

Over valued exchange rate- SPICED

Boom in domestic demand- increase demand for imports

Recession in key export markets- lower demand for exports

Lower global prices of exports- oil, PED inelastic, lower prices, lower revenue

Increase demand for imported technology- for consumers and firms

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What are the two policies to correct current account deficit

A

Expenditure reducing policy

Expenditure switching policy

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is expenditure reducing policy

A

Policies designed to reduce the overall level of consumption in an economy

Increase taxation
Decrease government spending
Increase interest rates and lower MPC

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Evaluation for expenditure reducing policy

A

Lower economic growth, cyclical unemployment
Lower living standards
Rising interest rates- hot money inflows, SPICED, cancel out trade improvements

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is expenditure switching policy

A

Designed to change the relative prices of exports and imports
Switch domestic demand towards domestic goods and away from imports
-protectionist (tariff, quotas, subsidies)
-lower exchange rate (only if Marshall Lerner Condition is in place)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is the Marshall Lerner Condition

A

If PEDx + PEDm >1, depreciation of a country’s exchange rate will lead to a net improvement in trade balance

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is exchange rate

A

The value of which one currency trades against another on the foreign exchange market

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What does the J curve show

A

Relationship between trade balance and the change in exchange rate

Weakening exchange rate would worsen the current account deficit first as PED inelastic in SR due to contracts signed and not enough time to find alternative, needs more money to purchase imports

In long term, it would improve as domestic demand would shift towards domestic goods if the Marshall Lerner Condition holds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is a floating exchange rate system

A

Value of currency is determined by market forces

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What are factors influencing floating exchange rate

A

-demand from foreigners and wishing to buy UK exports or increased tourism in UK- increase demand for £

-relative inflation- if UK inflation higher than trading partners, less competitive- decrease demand for £

-demand from foreign companies wishing to invest in UK through FDI

-increased interest rate- hot money inflows

-demand from speculators wishing to hold surplus fund in £

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What exchange rate would be better if UK wants to import goods from other countries

A

Strong exchange rate
Better ToT, could purchase more imports

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What exchange rate would be better if wanting to export to other countries

A

Weak exchange rate

Making prices look cheaper when priced in other currencies

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is revaluation

A

Increase in official exchange rate of a currency set by government or central bank

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is appreciation

A

Natural increase in the value of a currency due to market forces

Increase demand for £, pound would appreciate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is devaluation

A

Deliberate policy action by government or central bank to reduce official exchange rate of its currency

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is Depreciation

A

Currency’s value decreases due to market forces

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What are the advantages of floating exchange rate

A

Reduce need for currency reserves- as there is no exchange rate target

More economic stability- exchange rates can control inflation, stabilise current account and stimulate economic growth

Could correct trade deficit- larger trade deficit, WIDEC, increase exports
However, depends on PED

Reduce risk of currency speculation- when speculators try weaken the currency knowing gov/ central bank will strengthen, aim to buy low sell high

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What are the disadvantages of Floating exchange rate

A

Volatile
May make existing problems worse- already suffering in high inflation, further depreciation in currency

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is a fixed exchange rate

A

Where government seeks to keep value of currency of a certain level compared to other currencies
HK

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What are the advantages of fixed exchange rate

A

Stability- higher trade and investment- as less currency risk

Some flexibility- occasional devaluation/ revaluation

Reduce cost of safety net- businesses spend less on currency hedging

Disciplines on domestic producers- keeps prices low and costs low- increase productivity and focus on R&D, can’t rely on SPICED or WIDEC to achieve gains

Reinforces gains in comparative advantage- non-price competition reflects growth in X and M

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What are disadvantages in fixed exchange rate

A

Economy unable to respond to shocks

Require large amount of currency reserves- central bank needs to intervene

Speculation- speculators aim to buy low sell high

Policy conflict- growth, inflation, unemployment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What is a managed exchange rate

A

System allowing central bank to intervene regularly in foreign exchange market to change the direction of the currency’s float

One dotted line above equilibrium one line below
Price of £ and Q of £, S£ and D£

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Advantages of a managed exchange rate system

A

WIDEC:
Improves balance of trade

Reduce risk of recession

SPICED:
Decrease price of imported capital and technology- long run growth potential

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Disadvantages of managed exchange rate
Require lots of foreign currency reserves- sold and bought on regular basis Policy conflict Country accused for deliberately keeping value of currency low for comparative advantage
25
Government intervention in currency market
Monetary Policy- use interest rates to attract hot money inflows/ outflows to SPICED or WIDEC Open market operation- buying or selling foreign currency or bonds to influence demand and supply of currency Capital Control restricting quantity of a currency allowed to enter or leave an economy Restrict domestic citizens to get foreign assets and foreigners to purchase assets To prevent large movement of currency in and out
26
Consequence of devaluation/depreciation of currency
Trade tensions- tariff and quotas imposed Protectionist Response- one country increase tariff, the other ton respond the same- US China Disruption to global economy- harder to access raw materials
27
Impacts of change in exchange rate on current account
Weaken currency, improve current account- if Marshall Lerner Condition holds However, J Curve- short term depreciation would worsen current account
28
Impacts of change in exchange rate on economic growth and employment
Weaker currency- improve net export- increase AD- increase economic growth Lower unemployment in export industries
29
Impact of change in exchange rate in rate of inflation
Weaker currency- rise in import prices- cost push inflation
30
Impact of changing exchange rate on FDI flows
Weaker currency, country’s assets are more appealing However, may not be appealing enough to locate in a country
31
What are the measures of international competitiveness
1. Relative Unit Labour Cost -total wage divided by real output in a time period Measured in index number Increase relative unit labour cost- labour cost per unit rising faster in UK compared to other countries- UK is less competitive 2. Relative Export Prices -price of UK exports compared to exports of UK main trading partners -analysing price level of similar products produced in different countries -rising relative export price- UK export prices risen more than other countries- less competitive
31
Relation between international competitiveness and current account deficit
The lower the international competitiveness, the more likely to face current account deficit
32
Factors influencing international competitiveness
Exchange rate Productivity Non-wage cost of employment Regulation- more regulation, slow down business, higher CoP Investment- increase productivity Taxation- increase CoP Levels of inflation Factors of production-quality and quantity in the country- productivity Competition and demand domestically Trade Barriers- lower, easier and cheaper
33
Benefits of high competitiveness
Current account surplus Attract FDI Higher employment as increased output increased demand for labour and increased wages, increased standards of living Economic growth- due to increase AD increase productivity
34
Problems of not competitive
Trade deficit Declining industries Economic stagnation Unemployment
35
Problems being competitive
Not guaranteed in long run -as developing countries experiencing export led growth due to low labour cost -higher exchange rate lower competitiveness- but not always, if PED inelastic Overdependence- countries rely on export led growth- may suffer in global recessions
36
Definition of international competitiveness
Ability of a business or country to compete effectively in international markets
37
What is absolute poverty
Measures the number of people living below a certain income threshold Earning less than 60% of a country’s median income in 2011/12
38
What is relative poverty
Measures the extent to which people in society are worse off than others Earning less than 60% of a country’s median income
39
Measures of Absolute Poverty
Poverty Line- specific income level below which individuals or families are considered to be in absolute poverty £19375 Basic Needs Approach- assessing whether individuals can afford essential G+S -warm and damp free home, 2 warm meals a day, able to afford to visit friends and family in hospitals -able to afford to attend events such as family weddings and funeral Cost of Basic Needs- calculating the cost of a basket of G+S necessary for basic survival and determining whether individuals can afford it Joseph Rowntree Foundation- single person earn £25500 a year
40
Measures of Relative Poverty
Income inequality indices- Gini Coefficient or Palma Ratio-quantify income distribution Percentiles
41
What is Gini Coefficient
Measures income inequality Between 0-1, higher the number, the greater the degree of income inequality
42
What is the Palma Ratio
Measure of income inequality that compares the income of the top 10% of earners to the income of the bottom 40% of earners High Palma Ratio- high levels of income inequality
43
How to calculate Gini Coefficient
Area A/ Area A +Area B
44
Describe the Lorenz Curve
Y: Cumulative income 0-100% X: Cumulative population 0-100% Line of perfect equality x=y
45
Causes of poverty
Wage inequality Job insecurity and part time jobs- no guarantee of wages- could fall behind debt repayments Discrimination Low levels of education and training Unemployment Economic inactivity- long term illness, disability Housing cost Old Age- pension poverty- but they are more likely to own houses, so less pension poverty Regressive tax- VAT
46
Effects of Poverty
Lower productivity- poor health, less labour skills, less educated, less likely to be productive, lower MRP Greater demand on the welfare system
47
Income inequality
Unequal distribution of income among individuals
48
Disposable income
Income after tax
49
Discretionary income
Income after tax and all necessary expenses including food, energy, transport, and loans
50
What is wealth inequality
Unequal distribution of stock assets within individuals
51
What counts as income
Wages and salaries Welfare benefits Profits and dividends Rental income Interest payments Wealth generates incomes
52
What ways can wealth be held
Saving Ownership of shares Ownership of property Bonds
53
Factors leading to income inequality
Differences in skills and qualifications Difference in wealth- wealthier individuals earn more income from holding their assets Increase in part-time jobs- work not protected by trade unions and tend to be low paid Rising regressive indirect tax- alcohol, petrol, cigarettes increased faster than inflation, taking higher % of people’s disposable income
54
Factors leading to unequal distribution of wealth
Differences in income- save money and gain interests Differences in pension income- higher earners have better pension arrangements Inheritance- property and valuable assets passed down from one generation to the next Property- wealth can generate wealth
55
Advantages of Inequality
Incentive effect- if someone work harder to receive higher wage. It is essential to encourage extra effort Entrepreneurs requires rewards- inequality is necessary to encourage entrepreneurs to take risks and set up new business Trickle down effect- if someone gain extra income and can trickle down to other people- entrepreneurs sets up businesses and create jobs providing income for others Fairness- people deserve higher income if their skills are good
56
Impact of economic change and development on inequalities- what is Kuznets hypothesis
Suggest that as an economy develops from a low income agricultural society to higher income industrial society and then post industrial society- income inequality follows a specific pattern Low income stage- agricultural- income inequality is low- people having similar jobs and there is limited opportunities High income stage- industrialisation- growth of cities and emergence of new industries- wage disparities between skilled and unskilled workers and between rural and urban areas Turning point- income inequality reaches peak when economy shifts from industrialisation to more advanced post industrial economy High income stage- more service industries, education and technology- even distribution
57
Significance of capitalism for inequalities
Capitalist economy leads to income inequality due to wage differentials Wages vary due to supply and demand Individuals own resources- wealth differs based on assets owned Argued at equality will never be reached as it is important to encourage hard work Inequality is essential for capitalism to work
58
When does economic growth reduce relative poverty
Wages of the lowest paid rise faster than average wage Government benefits and pensions rise in line with average wage Economic growth creates job opportunities which reduce level of unemployment Minimum wage increase in line with average earning Progressive income tax

Alevelllll (26 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions