Macro Pack 8 Flashcards
Define the term “balance of payments”.
The balance of payments (BoP) is a record of all economic transactions between residents of a country and the rest of the world over a period of time.
Identify and explain the four parts of the current account.
Trade in goods: Exports and imports of physical goods.
Trade in services: Exports and imports of intangible services (e.g. banking, tourism).
Primary income: Income from investments abroad, such as dividends and interest.
Secondary income: Transfers such as aid, remittances, and EU contributions.
Define the term “current account deficit”.
A current account deficit occurs when a country imports more goods, services, and income than it exports, leading to a net outflow of money.
Summarise the UK’s current account position over the last 25 years.
The UK has mostly run a current account deficit, especially due to a persistent trade deficit in goods. There have been surpluses in services, but not enough to offset the goods deficit.
Define the term “exchange rate”
An exchange rate is the value of one currency expressed in terms of another, e.g., £1 = $1.30.
Use a diagram to explain how exchange rates are determined in the UK
In a floating exchange rate system, the exchange rate is determined by supply and demand for the currency.
Demand for £ comes from exports, foreign investment, etc.
Supply of £ comes from imports, UK investment abroad, etc.(A diagram would show the intersection of demand and supply curves for £.)
Show the effect of an increase in the demand for currency on the exchange rate
An increase in demand for £ (e.g., due to higher UK interest rates or strong exports) shifts the demand curve right, causing an appreciation of the £.
Show the effect of an increase in the supply of the currency on the exchange rate
An increase in supply (e.g., more UK imports or UK investment abroad) shifts the supply curve right, causing a depreciation of the £.
Explain two factors which could cause a stronger currency (an appreciation)
Higher interest rates: Attracts foreign investment.
Strong export performance: Increases foreign demand for £ to buy UK goods.
What is “hot money”?
Hot money refers to flows of capital moving quickly between countries to take advantage of short-term interest rate differences or speculative opportunities.
How does a rise in interest rates increase the exchange rate?
Higher interest rates attract hot money inflows, increasing demand for the currency, leading to an appreciation.
How does a weaker currency impact on:
a) Export prices to foreigners: Makes exports cheaper, boosting demand.
b) Import costs: Makes imports more expensive, potentially raising inflation.
How does a stronger currency impact on:
a) Export prices to foreigners: Makes exports more expensive, reducing competitiveness.
b) Import costs: Makes imports cheaper, lowering input, and consumer prices.
Show the effect of a stronger currency on an AD-AS model
A stronger £ reduces net exports, shifting AD left, potentially lowering output and inflation.
Explain how macroeconomic objectives may be affected by a weakening of the pound
Current account: Improves due to cheaper exports and more expensive imports.
Growth: May increase due to higher net exports.
Unemployment: Likely to fall as demand for UK goods rises.
Inflation: Likely to rise due to costlier imports.
Explain five possible reasons for a current account deficit/low net trade figure
Over-reliance on imports.
Decline in manufacturing competitiveness.
Strong currency.
Low productivity.
Structural economic issues (e.g. deindustrialisation).
Explain at least three methods of protectionism
Tariffs: Taxes on imports.
Quotas: Limits on quantity of imports.
Subsidies: Government financial support for domestic firms.
