The International Economy 2
- Created by: ekenny5
- Created on: 16-04-22 10:27
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- The International Economy [2]
- The Balance of Payments
- current account: balance of trade in goods and services, net primary income (interest, profits), net secondary income (EU contributions, military aid)
- surplus - net inflow of income into the country. allows for a financial deficit. creditor nations
- deficit - net outflow of income out of the country. debtor nations
- capital account: sale of transferable contracts, debt forgiveness, capital transfers of fixed assets
- financial account: net FDI balance, net portfolio investment flows, banking flows, value of gold or reserve currency
- causes of CA deficit
- poor competition
- strong exchange rate
- recession in trading partners
- volatile global prices
- causes of CA surpluses
- saving over investment
- large gap of X and M
- high prices of exports
- factors influencing
- productivity
- inflation
- exchange rate
- investment flows between countries effects the financial account
- affect ability to export - MNCs
- policies to correct BoP
- demand management
- tightening fiscal/monetary policy to reduce spending
- lower exchange rate
- supply side improvements
- raise productivity, investment in human capital
- protectionist measures
- expenditure switching - change relative prices of X and M
- expenditure reducing - lower real incomes and AD
- demand management
- consequences
- D - loss of AD, depreciating exchange rates, cost push inflation, borrowing increases debt, loss of confidence
- S - allow deficit on the capital account, surplus foreign currency can fund investment abroad, usually fairly strong exchange
- current account: balance of trade in goods and services, net primary income (interest, profits), net secondary income (EU contributions, military aid)
- Exchange Rate Systems
- free-floating
- depends on market forces of supply and demand
- +ve - no intervention by central bank, no target
- -ve - may be unstable - investment impacts,
- depends on market forces of supply and demand
- floating
- pegged to an anchor currency. the CB must hold a reserve currency to fix the peg
- +ve - confidence to invest, stability to control inflation, lower borrowing costs, less speculation
- -ve - reduced freedom of IR for other objectives, do not have sufficient reserve currency, can devalue,
- managed floating
- a degree of freedom, CB intervene occasionally to buy or sell a currency
- +ve - can attract foreign investment, avoid deflationary pressures, allows for competitive devaluation
- -ve - may look like protectionism, makes it more difficult to export
- competitive devaluation - improving competitiveness by manipulating exchange rates
- done by: changing interest rates, QE, direct intervention (buying and selling), taxation of foreign deposits
- a degree of freedom, CB intervene occasionally to buy or sell a currency
- free-floating
- Economic Growth and Development
- growth: increased real national income
- development: improvement in quality of life
- less developed countries
- low income per capita
- lower productivity
- high dependency on exports
- fast growth of population
- weak infrastructure
- indicators of development
- GDP per capita
- education standards
- healthcare
- life expectancy
- HDI - longevity, basic education, and minimal income
- factors affecting
- infrastructure, education, investment, savings, politics, macro stability, factor mobility, natural resources
- The Balance of Payments
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