- Created by: I used to be smart
- Created on: 03-04-13 13:58
What are International Policies?
International Policies are economic policies aimed at changing (improving) a country's balance of payments.
- In the UKs case the B of P deficit needs to be reduced (X<M)
- In an economy where there is a B of P surplus (X>M) eg. China, the problem caused is demand pull inflation.
1) Exchange Rate Policies: B of P deficit
Exchange Rate Policies are changing a country's B of P exchange rate to affect the B of P.
Exchange rate is the ratio of one currency to another.
The UK runs a B of P deficit so a DEVALUATION is needed to improve the B of P.
Bank of England (indep. since 1997) can reduce interest rates. This will lead to an outflow of "hot money" as foreigners wouldn't want to save in UK commercial banks and would want to save their money in a bank with higher interest, reducing demand for £ and ER.
buy foreign currency and sell £ on the Foreign Exhange Market to increase supply of £ leading to devaluation i.e. fall in ER.
The P of X falls and P of M rises leading to an increase in X and decrease in M. This increases AD, reduces demand deficient u/ment, increases d. pull inflation.
Exchange Rate Policies: B of P surplus
When running a B of P surplus eg. China, the central bank could increase interest rates meaning foreigners would want to save in Chinese banks. This will lead to an increase in demand for Yuans i.e. appreciation.
Price of X will increase and P of M will decrease causing an increase in M and decrease in X. ER will rise.
The increase in D Yuan will lead to a fall in AD, curing the demand pull inflation caused by the B of P surplus. Can increase u/ment depending on stage of AS curve. However, this is unlikely as the ec. is overheating.
Proctectionist policies are government policies restricting the number of imports allowed into the country.
There are 2 types
i) Tariffs - an additional tax on imports. This shifts the supply curve left and increases demand for the substitute homegrown good. It may increase AD and reduce B of P deficit.
Also as labour is derived demand there'll be an increase in tax revenue -> subsidise British industries -> decrease budget deficit and nat. debt. Increase on G on merit goods thus increase in AD (S/R ec growth) and increase in LRAS/PPC.
Problem: retaliation, do not gain benefits from globalisation, political isolation.
ii) Quota - a numerical limit on the number of imports allowed into a country.