Macroeconomics 3

Front 1

What is an exchange rate?

Back 1

The price of one currency in terms of another. It determines the price of imports and exports.

Front 2

What is the exchange rate of the £ determined by?

Back 2

The interaction between the demand for and the supply of the £.

Front 3

What is appreciation?

Back 3

When a currency gains value against another. E.g. if £1 goes from being worth $1.40 to $1.60, then the £ has appreciated against the dollar, as you can buy more of a foreign currency with £1.

Front 4

What is depreciation?

Back 4

When a currency loses value against another. E.g. if $1 goes from being worth £0.72 to £0.82 the £ has depreciated, as you can buy fewer $ with £1.

Front 5

If the £ appreciates against the dollar,...

Back 5

The dollar must depreciate against the £.

Front 6

What has happened to the £ in this diagram?

Back 6

The £ has appreciated, because the demand for £ has increased.

Front 7

What has happened to the £ in this diagram?

Back 7

The £ has appreciated, because the supply of Euro has increased, so the euro has depreciated against the £.

Front 8

Foreign currency = ?

Back 8

British currency × Exchange rate

Front 9

British currency = ?

Back 9

Foreign currency ÷ Exchange rate

(Assuming the exchange rate is foreign:GBP)

Front 10

To flip an exchange rate,

Back 10

1 ÷ exchange rate.

Front 11

Factors that will shift the demand for £.

Back 11

1) Exports from the UK (including tourism) - E.g. Increased demand for exports leads to increased demand for £ to pay for exports, so £ appreciates.

2) Savings in the UK - E.g. Increase in UK interest rates (relative to rest of world) leads to more savers seeking return on savings in UK, lead to higher demand for £, so £ appreciates.

3) Investment into the UK - E.g. Decrease in confidence in the UK economy leads to decreased investment in the UK, so demand for £ falls and £ depreciates.

4) Speculators - E.g. If there is an expectation £ will appreciate, speculators will buy more £ so their will be an increased demand for £ and the £ will appreciate.

Front 12

Which group make up the vast majority of currency transactions?

Back 12

Speculators.

Front 13

Factors that shift the supply of £.

Back 13

1) Imports into the UK - E.g. increased demand for imports leads to an increased supply of £, so the £ depreciates.

2) Savings out of the UK - E.g. Increase in a foreign country's relative interest rate leads to more UK savers seeking higher returns on their investment in a foreign country. This leads to increa supply of £, so the £ depreciates.

3) Investment from UK - E.g. Increased confidence in a foreign economy leads to increased investment from UK, si their is an increase in the supply of £, so £ depreciates.

4) Speculators - E.g. If their is an expectation that $ will depreciate, speculators won't use £ to buy $, so their is a decrease in the supply of £, so the £ appreciates.

Front 14

What happens to imports and exports if the exchange rate appreciates?

Back 14

Imports will become cheaper, so the demand for imports will increase.

Exports will become more expensive, so the demand for exports will decrease.

Front 15

What happens to imports and exports if the exchange rate depreciates?

Back 15

Imports become more expensive, so the demand for imports decreases.

Exports become cheaper, so the demand for exports decreases.

Front 16

How does a change in the interest rate cause a change in the exchange rate?

Back 16

When interest rates rise relative to other countries' interest rates this attracts flows of money (short term financial 'capital' or 'hot money' into the country's banks to take advantage of the high interest rates. This "interest differential" boosts the demand for the currency and can cause its value to rise.

Interest rates and exchange rates tend to move in the same direction.

Front 17

8 Factors that affect the exchange rate:

Back 17

1) Relative interest rates

2) Relative inflation rates

3) Income levels

4) Quality of production

5) Price competitiveness

6) Optimism in currency markets

7) Foreign investment levels.

8) Government credibility (in terms of its ability to ensure economic stability).

Front 18

Why will the effect depreciation has on the current account of the balance of payments depend on PED?

Back 18

A fall in the value of the £ may not increase income from exports or decrease expenditure on imports (thus reducing the current account deficit) if demand for exports and imports is inelastic, and therefore not sensitive to changes in price.

Front 19

How will depreciation result in inflation?

Back 19

If the exchange rate is low, thus will mean the cost of raw materials increases. This will put up prices, leading to cost push inflation.

Front 20

How will appreciation make domestic firms more efficient?

Back 20

If the exchange rate is high, then imports will be cheaper so domestic trims must become more efficient in order to compete with the cheaper foreign imports. Exports will also be less competitive, so they must become more efficient to compete in international markets.

Front 21

How will depreciation cause higher employment in export industries?

Back 21

If exchange rates are low, then exports will be cheaper for other countries to buy, meaning there is more demand for exports and the exporting companies make more profit. This means they can employ more people.

Front 22

How will appreciation result in domestic industries facing lower demand?

Back 22

If the exchange rate is high, then imports will be cheaper than domestically produced goods and services. This means there will be lower demand for UK firms' goods and services.

Front 23

How will depreciation result in higher employment in domestic industries?

Back 23

If the exchange rate is low, then imports will be more expensive, meaning there will be greater demand for domestic substitute goods. Therefore, domestic producers will employ more people to increase output to keep up with supply.

Front 24

How will appreciation result in an increase in standard of living?

Back 24

If the exchange rate is high, imports are cheaper so more can be bought. This means that living standards increase.

Front 25

How will appreciation result in downward pressure on inflation?

Back 25

When exchange rates are high, the price of imports drop causing a fall in the general price level. Also, if imports are cheaper there will be less demand for domestic products, reducing demand pull inflation.

Front 26

How will appreciation result in lower profits for exporters?

Back 26

If the exchange rate is high, then exports will be more expensive so there will be less demand for exports, so exporters make less profit.

Front 27

What is globalisation?

Back 27

It is the growth of international markets for goods and services, labour and financial capital. The increasing integration of the global economy, resulting in an increased international interdependence.

Front 28

What are the main features of globalisation?

Back 28

1) Increased specialisation and outsourcing.

2) Increased importance of international trade.

3) Growth if MNCs/TNCs.

4) A reduction in the economic independence of governments (e.g. to raise taxes).

5) Regionalism - the growth of trading blocks.

Front 29

What are the 7 causes of globalisation?

Back 29

1) Economies of scale due to bigger markets leading to bigger profits for companies.

2) Lower transport costs

3) Growth in international markets.

4) Rising GDP increases demand for imports.

5) Cheaper ways to communicate.

6) Fewer barriers to trade.

7) Internationalisation of capital markets.

Front 30

What is economic growth?

Back 30

An increase in real GDP over time (short run).

An increase in the productive capacity of the economy (long run).

Front 31

How do you measure economic development?

Back 31

Measures include GDP growth but also other indicators such as life expectancy, literacy rates and access to technology. It is a measure of economic welfare (quality of life). All measured by the Human Development Index (HDI).

Front 32

How do countries grow?

Back 32

Countries grow by an increase in the quality, quantity and efficiency of use of the factors of production.

Front 33

What might an increase in land mean?

Back 33

Using farm land more efficiently, finding new mineral resources.

Front 34

How might you increase labour?

Back 34

Increase human capital by better education and training, healthcare and welfare.

Front 35

How might you increase capital?

Back 35

Increases in capital stock and technological innovation. These will increase productivity.

Front 36

What is a multinational corporation?

Back 36

A firm which own or controls the production of goods or services in at least two countries.

Front 37

What is a developed country?

Back 37

A state with developed economy and infrastructure, relative to other nations.

Front 38

What is a less developed country?

Back 38

A state with a less developed economy and infrastructure, relative to other nations.

Front 39

Definition of globalisation.

Back 39

The process by which businesses/organisations develop international influence of start operating on a global scale.

Front 40

What is protectionism?

Back 40

When trade between countries is restricted by tariffs and quotas.

Front 41

What is Foreign Direct Investment?

Back 41

When a MNC sets up a production or distribution facility in another country.

Front 42

What is free trade?

Back 42

When there are no barriers to trade between countries.

Front 43

Why do LDCs experience low levels of growth and development?

Back 43

Front 44

What are the benefits of globalisation to an economy?

Back 44

1) Increased availablility of skilled labour - MNCs may spend money on training to improve the skills and productivity of workers. This means there will be an increase in the country's productive capacity.

2) Increased exports - Due to globalisation there is a much larger market for exports, leading to n increase in demand for exports.

3) Increased productivity - An increase in overseas workers moving to a country will mean producers can employ more skilled and productive workers, leading to an increase in productivity.

4) High levels of FDI - Increased foreign investment in the UK will result in more jobs/higher standard of living.

5) Sustained economic growth - If companies gain economies of scale from globalisation, they will be able to produce more, leading to an increase in output.

6) Wider range of products available - Increased availability of imports means consumers can buy more products/increases competition.

Front 45

What are the costs of globalisation?

Back 45

1) Small firms may not be able to compete in global markets - If global markets are too competitive, only large firms with economies of scale will be able to compete, pushing small firms out of business.

2) Increased structural unemployment - Firms may relocate to other countries where costs if production are lower/be able to purchase capital more cheaply in international markets, resulting in structural unemployment.

3) Balance of payments deficit - If a country specialises in a certain good or service (or hit an economic boom) they may need to import more, resulting in current account deficit.