Pack 8: International Economics pt2

Question 1

What is the exchange rate?

Answer 1

Price or value of one currency in terms of another

Question 2

What is floating exchange rate?

Answer 2

Governments allowing the exchange rate to be determined by market forces and there is no attempt to influence it.

Question 3

What is appreciation?

Answer 3

Value of a currency rising because of market forces

Question 4

What is depreciation?

Answer 4

Value of a currency falling because of market forces

Question 5

What are the benefits to a floating exchange rate?

Answer 5

~Flexibility
~Robust system

Question 6

What causes changes in demand/supply for the currency?

Answer 6

~Export changes (import for supply)
~Inflation
~Economic growth and FDI
~Interest rates
~Purchasing government bonds
~Speculation

Question 7

What is a fixed exchange rate?

Answer 7

Rate of exchange between at least 2 currencies, which is constant over time

Question 8

What is a managed exchange rate?

Answer 8

Value of currency determined by free market, but governments occasionally intervene

Question 9

What are the benefits to a fixed exchange rate?

Answer 9

~Stability
~Encourages financial discipline in country

Question 10

What is revaluation?

Answer 10

When policymakers officially fix a new higher value for the currency in a fixed exchange rate system

Question 11

What is devaluation?

Answer 11

When policymakers fix a new lower value for the currency in a fixed exchange rate system

Question 12

How can the government intervene with fixed and managed exchange rates?

Answer 12

~Foreign currency transactions
~Use of interest rates
~Currency controls
~Borrowing from institutions, e.g. the IMF

Question 13

What would be the effects of a weaker exchange rate assuming the market had elastic demand?

Answer 13

~Up exports, down imports
~Economic growth and employment
~Up inflation
~Up FDI

Question 14

What is competitive devaluation?

Answer 14

When country deliberately intervenes to drive down thee value of their currency to provide a competitive boost to demand and jobs in their export industries

Question 15

What are the costs of governments pursuing a policy of competitive devaluation?

Answer 15

Form of protectionism that could lead to currency wars or at the least higher inflation and currency volatility

Question 16

What is Marshall Learner Condition?

Answer 16

Fall in exchange rate will lead to an improvement in the current account as long as the combined price elasticity of demand for exports and imports are greater than 1.

Question 17

What is the J curve?

Answer 17

Theory that shows a fall in the exchange rate will initially lead to a deterioration in the current account before improving in the long-term

Question 18

What is the difference between the PED for exports and imports short-run vs. long-run?

Answer 18

Short-run more price inelastic as economic agents need time to switch buying behaviour or could be tied into contracts, e.g. forward contracts, so will become more elastic long-run as all variables can change

Question 19

What is international competitiveness?

Answer 19

The ability of a country to sell its goods and services abroad

Question 20

Why is it hard to measure international competitiveness?

Answer 20

~Many factors to consider
~Can be subjective (quality of goods)
~Data needed from many countries to form a relative assessment

Question 21

What are the measures of international competitiveness?

Answer 21

~Relative unit labour costs
~Relative export prices
~Non-price competitiveness (quality, service, reliability and durability)

Question 22

What are relative unit labour costs?

Answer 22

Cost of employing people divided by total (real) output, compared to other countries

Question 23

What are relative export prices?

Answer 23

Price of goods sold abroad, compared to other countries

Question 24

What factors influence international competitiveness?

Answer 24

~Exchange rate
~Productivity
~Wage and non-wage costs
~Regulation
~Quality
~Research and development
~Taxation
~Levels of inflation
~Free trade and protectionist policies

Question 25

What are the benefits of being internationally competitive?

Answer 25

~Balance of payments (current and financial) ~Economic growth ~Employment ~Impact on FDI ~Impact on exchange rate

Question 26

What are balance of payments?

Answer 26

Record of all financial dealings over a period of time between economic agents of one country and all other countries

Question 27

What are the three main components of the balance of payments?

Answer 27

~Current account ~Financial account ~Capital account

Question 28

What is the relationship between these three main components of the balance of payments?

Answer 28

Current account = Capital account + Financial account

Question 29

What is the current account?

Answer 29

The part of the balance of payments where payments for goods and services, investment income and transfers are recorded

Question 30

What is the financial account?

Answer 30

Component of the balance of payments where transactions associated with changes of ownership of the UK's foreign financial assets and liabilities are recorded

Question 31

What does the financial accounts of the balance of payments include?

Answer 31

~Direct investment ~Portfolio investment ~Other investment ~Reserve assets

Question 32

What is the Capital Account?

Answer 32

Component of the balance of payments where transactions in fixed assets are recoreded

Question 33

What does the capital account on the balance of payments involve? (very small part of balance of payments)

Answer 33

~Transfer of assets when migrants change nationality ~Government transfers, e.g. debt forgiveness to LEDC's

Question 34

What is a current account deficit?

Answer 34

The amount by which money relating to trade, investment income and transfers going out of a country is more than the amount coming in. (opposite for surplus)

Question 35

What are the causes of a current account surplus/deficit?

Answer 35

~Exchange rate ~International competitiveness ~Economic growth and savings ~Changes in investment income and transfers

Question 36

a current account deficit be a problem if:?

Answer 36

~it indicates a lack of international competitiveness and decline in manufacturing ~Caused by excessive consumer debt ~Large and sustained and cannot be financed ~cannot be self-corrected painlessly

Question 37

However, the current account deficit may not be a problem if:?

Answer 37

~Used to import capital goods to improve long-term competitiveness ~Consumers are living within their means ~Could easily be financed by other accounts on the balance of payments ~The economy naturally self corrects deficit

Question 38

What are the benefits of a current account surplus?

Answer 38

~Circular flow of income ~Economic growth + employment ~Avoids issues of financing current account deficit

Question 39

What are some of the problems with a current account surplus?

Answer 39

~Export dependence ~Lack of focus on domestic markets ~Susceptible to Protectionism

Question 40

What are the issues that come with global imbalances?

Answer 40

~Low interest rates in deficit countries ~Bubbles, bust and recessions in deficit countries ~Fall in global demand for exports and recession in surplus countries ~Fluctuating exchange rates ~Rise in protectionism

Question 41

What policies can businesses introduce to improve competitiveness?

Answer 41

~Improving the workforce ~Investment in capital goods ~Market research ~Relocation of production ~research and development

Question 42

What supply-side policies can governments introduce to boost competitiveness?

Answer 42

~Education and training ~Improved infrastructure ~Reduced corporation tax ~Promote competition and small business

Question 43

What other policies could the government introduce to improve competitiveness?

Answer 43

~Exchange rate policies ~Demand-side policies ~Protectionism and trade policies

Question 44

What are policies to reduce current account deficits?

Answer 44

~Supply-side policies ~Contractionary demand side policies ~Decreasing the exchange rate ~Protectionist policies

Question 45

What are policies to reduce current account surplus?

Answer 45

~Policies to stimulate domestic spending ~Increasing exchange rate ~Remove protectionist policies