BoP, Trade and Protectionism

Question 1

Financial account

Answer 1

-Portfolio investment: bonds, shares, derivatives
-Foreign direct investment
-Reserves: currency, gold
-FA surplus to balance the account, if running a current account deficit

Question 2

Consequences of a current account deficit

Answer 2

-Lower AD, lower growth, higher unemployment
-Debt burdens, debt fuelled spending via the financial account may see overseas investors loose faith in the ability of the domestic government to pay money back that it is issuing as debt. Currency crisis, economic crisis.
-Reduce exchange rate, could automatically correct the CA deficit but could lead to stagflation

Question 3

Expenditure reducing and expenditure switching policies & supply side policies to boost competitiveness:
-Evaluation

Answer 3

-Expenditure reducing policies: contractionary monetary/fiscal policy.
But:
-conflict of objectives (growth, rise in unemployment), consumer and business confidence(AD may not change) MPM
-ESP: Protectionism
But: Retaliation tariffs may be harsher worsening the trade balance, WTO, inflationary, loss of efficiency
-ESP: Exchange rate, interest rates, selling domestic currency reserve
But:Marshall lerner condition, inflation
-Supply side policies to boost international competitiveness
But: time, cost, no guarantee of success targeted to the root cause of the CA deficit

Evaluation:
-Conflict of objectives
-Cause of the current account deficit
-Time lags/cost
-Is the CA deficit actually a problem

Question 4

Causes and consequences of a current account surplus

Answer 4

-Demand:
high incomes abroad
low income at home
weak exchange rate
-Supply:
low relative inflation
low ULC: low min wages, weak unions, high productivity
strong investment
gains in comparative advantage
new resource discoveries

Consequences:
Increase AD, (X-M) increase, inc growth, lower unemployment
inflation
FA deficit, sitting on worthless assets
appreciation of the exchange rate, stabilise the current account
sign of unbalanced economy ? not enough production for domestic consumers, no other avenues for growth if export demand falls.

Question 5

Gains of free trade

Answer 5

-Increased efficiency, improve allocation of world resources, due to comparative advantage
-Access to goods that wouldn’t be produced domestically
-Lower price: competition, EoS, technological transfers
-Economic growth, (X-M)

Question 6

Reasons for protectionism:
-Evaluation

Answer 6

-Infant industry argument: promoting efficiencies
-Protect against dumping: sale of good below it’s cost of production, protect domestic industries, dumping is hard to prove, trade talks to solve
-Protect domestic employment: declining sector allow it to happen
-Protect against unfair low cost labour abroad
-Protect product standards
-To raise government revenue
-Improve current account deficit, increase growth
-Avoid the risk of over-specialisation, develop other industries

Question 7

WTO- Aims and roles

Answer 7

-International organisation that regulates world trade
-Ideal trade would be:
Non discriminatory
Free from barriers
Predictable
Promoting fair competition
Beneficial for developing countries through special provisions

Roles of WTO:
Set and enforce rules on int. trade
Resolve trade disputes
Provide a forum for negotiating trade liberalisation

Question 8

International competitiveness

Answer 8

-the ability of a nation to compete successfully overseas and to sustain improvements in living standards and output

-price competitiveness
-non price competitiveness: branding, service quality, reliability, innovation
-ability to attract FDI

Measures:
-ULC: productivity, Min wages
-GCI:global competitiveness index
-TOT:

Factors that determine international competitiveness:
ULC’s
Labour flexibility: how easily can workers move jobs, skills, part-time
-Labour skills
-Tax regimes
-Innovation
-Infrastructure
-regulation
-economic stability