globalisation and development · globalisation and development - this unit is about globalisation...
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UK Economy and Globalisation
Revision Notes – if you do one thing…..
Globalisation and Development - This unit is about globalisation and
international trade. There are both benefits and drawbacks of international trade:
Benefits Drawbacks
Specialisation means countries can focus on the areas they are best at (where they have an absolute advantage) which should lead to increased global output
Allows individuals and firms to obtain goods that are not available in their country
Increases choice for consumers
Enables goods and services to be obtained at lower prices (raises living standards and may reduce inflation)
Increases competition helping to prevent monopolies
Bigger market enabling firms to gain from economies of scale and increase sales and profits
Reduces firms’ reliance on domestic markets (risk bearing economies of scale)
How trade reduces poverty – trade can help people to earn more money and therefore buy more goods and services. For example, as China has developed, many people are now paid more for working in factories than they used to get from working on farms etc in rural areas.
Increased competition from foreign firms may lead to domestic firms closing and jobs being lost
Global Interdependence rises as a result of trade. When economies are doing well this will lead to higher growth and employment but when a global shock hits, such as the credit crunch, the resulting recession spread to other countries. – eg if the USA has a recession they will buy less products from China causing problems for Chinese business.
Environment – International trade can bring with it a variety of negative externalities such as pollution, increased CO2 emissions etc. Increased trade means increasing these costs, eg environmental costs associated with transporting goods
How trade leads to income inequality – Often the benefits of trade are not shared out equally. Developed countries tend to benefit more from trade than some developing countries. Also within countries the benefits may not be shared out equally. Entrepreneurs and business people may see more of the benefits than the workers, particularly in developing countries where wages are often low. Trade may also lead to income inequality if people are made unemployed due to foreign competition.
Does trade benefit all?
Developing countries and their people sometimes face problems gaining the benefits from
trade. Factors such as those below can limit the benefits to be had from trade
Poor infrastructure
Poor education and training
Health and population problems
Debt
Weak government and corruption
Low inward investment
Lack of foreign currency
In addition, sometimes trade can pose problems for people in/and for developed countries.
Jobs may be lost and people unemployed due to competition from cheap goods produced
overseas. Countries may experience balance of payments problems if they are not
competitive.
Increasing Globalisation
Globalisation – an expansion of world trade in goods and services leading to greater
international interdependence
Benefits of globalisation to the UK
Low Inflation – due to greater competition and ability to produce in low cost countries
Wider choice of products and services
Larger Market for UK Products
Rising Productivity – caused by foreign companies setting up in UK and bringing with them new
methods and ideas (skills and technology transfer)
High levels of FDI
Costs of globalisation to the UK
Increased Competition
Loss of Jobs due to above
FDI may leave – to move to low cost countries
Increased Vulnerability to External Shocks – due to international interdependence
Environmental Problems – negative externalities associated with trade and economic development
Factors Contributing to Globalisation Improvements in Transportation The costs of moving goods between countries have been reduced due to new technologies and competition. Containerisation means that goods can quickly move from ship to lorry so handling and hence costs can be reduced. With lower transport costs goods can be traded competitively around the world Improvements in ICT ICT has made sending and communicating information very quick and very cheap. Contracts, orders, information and payments can be sent between countries immediately and at low cost. The promotion of products via the internet to a worldwide market has greatly encouraged world trade
Rising Living Standards As countries have become richer, their citizens have demanded not only more goods but a wider variety. This growth in consumer demand has stimulated world trade.
Decline in Protectionism More countries now encourage trade. There are fewer barriers to trade with fewer tariffs on imports. Organisations such as the WTO promote world trade.
Economies of Scale Technological improvements often mean that companies have to mass produce and sell to large markets. This means that domestic markets are not enough, and large businesses have to look overseas. Not only this but they often open up factories overseas to take advantage of cheaper production costs
Page 2.) After the global recession, a global recovery?
Interdependence – the evidence points out one disadvantage of globalisation,
interdependence. When the global recession hit, many countries experienced negative
growth. It also suggests that the global economy has bounced back and is recovering.
BUT – at present the global economy is starting to slow down and as a result many
countries are experiencing much lower growth rates than are forecast in the case study –
Interdependence strikes back!
The evidence suggests that different parts of the world are forecast to grow at different
rates. In particular, the case study suggests the fastest growing economies will be
developing economies.
The intro suggests the focus of the case study is:
Why some parts of the world are forecast to grow more quickly than others?
The consequences of this for different parts of the global economy
Why some developing economies are growing so quickly
The impact of schemes such as debt relief and fair trade on economic prosperity
The evidence sets the scene for the case study and also provides us with some possible
clues for the last question. Could it be something like?
Using the information in the case study and your own knowledge of economics, evaluate the extent
to which the benefits of international trade outweigh the costs for developed / less developed
countries
To what extent has/does increased globalisation benefited the UK / less developed countries
To what extent does increased trade / globalisation benefit all countries. Use the evidence from
the data to give reasons for your answer
Using the information in the case study and your own knowledge of economics, evaluate why some
countries benefit more from trade than others
Using the information in the case study and your own knowledge of economics, evaluate the
effectiveness of Fair Trade / Debt Relief / Other Policies in supporting the growth of less
developed countries.
Page 3 - Figure 1 – Real GDP and Global Exports
The evidence looks at what has happened to global exports and global economic growth
between 2002 and 2011
Export – goods and services which firms in one country provide and sell to people and firms
outside that country. They result in money coming into the country
GDP – the total value of goods and services produced in a period of time. Real means that
this has been adjusted for the effects of inflation
Economic Growth – the change in the total value of output of goods and services produced
in a period of time
Recession – 2 consecutive quarters of negative growth. The global economy experienced a
recession in 2009
Growth and Exports
The data illustrates the link between global economic growth and global exports.
When the global economy is growing the demand for exports rises.
As world GDP grows, countries spend more on food and manufactured goods. As a
result the demand for these increases and exports rise.
As countries produce more manufactured goods they need more metals and fuel. As
a result exports of fuel and mining products rise.
Interdependence – is the way countries depend on other countries. This is because
countries import and export. The evidence shows how economies are interconnected. This
is because many goods and services produced in one economy are sold as exports in other
countries. If a recession hits and people buy less for example in the UK some of the things
they will be buying less of will be produced overseas.
We can see from the data that countries that export manufactured goods were particularly
hit by the recession in 2009 but also benefit most when the global economy is growing.
Page 4 – Figure 2: Real GDP growth rates for selected areas and
economies – 2012 -2016
The evidence shows growth rates for different countries. The main trends are as follows:
Developed economies have been growing more slowly than developing economies
Developed economies are forecast to grow more slowly than developing economies
The growth rate of developed economies is forecast to rise
Some developing economies are forecast to grow much more quickly than others
Of the developed economies the growth of the Eurozone countries is the lowest. In
2012 and 2013 the Eurozone as a whole has been in a recession
Costs and Benefits of high growth rates in developing economies for developed
countries such as the UK
Bad Good
Risk of some developed economies falling behind and becoming the low wage economies of the future if they are not competitive
As developing countries develop they may move into higher value added goods and services leading to more competition in developed economies. This could cost jobs and lead to lower growth rates
Stronger competition from cheap imports may see a further deterioration of the balance of payments in countries like the UK
Growth of developing countries is increasing the demand for scarce resources such as metal and oil which in turn is pushing the price up and increasing inflationary pressures
Rapid development may lead to negative externalities such as pollution and may increase climate change
Increased output from developing economies has led to higher living standards in the developed economies as we have benefitted from cheaper manufactured goods
As goods have been produced more cheaply in developing countries this has helped to keep inflationary pressures low in developed economies
Large potential market - As developing countries grow incomes rise and consumers from these countries may purchase more goods and services (exports) from developed economies. This represents an opportunity for businesses in developed countries
Technology / Skills Transfer – developed countries may benefit from technology, skills, ideas and products that are developed in emerging economies.
BUT – how accurate is this data? Currently (in 2016) the global economy has been slowing
down. Some developing countries are seeing much lower growth rates, particularly those
that export commodities and oil, as prices of these have fallen.
Page 6 – Figure 3 Reasons why some economies are predicted to grow
more quickly than others.
The evidence looks at reasons why some countries are predicted to grow more quickly than
others
Possible Reasons for Faster Growth
Inward Chinese Investment (Chinese FDI) - FDI directly adds to growth as it results in more goods and services being
produced in a country. Countries may also benefit from a multiplier effect as more people are employed and other
firms benefit from increased demand as a result. If a skills and technology transfer takes place productivity may
increase which also boosts growth
Smaller Economies - Catch up and convergence . It is easier for a smaller less developed economy to grow fast as
they can import and replicate the production methods and technologies of more developed countries.
High Commodity Exports - As the global economy is recovering there are more goods and services being produced.
As global output increases, there is an increased demand for commodities such as oil and metals, in order for these
to be produced. HOWEVER – In 2016 the global economy is slowing down leading to a fall in demand for
commodities. There has also been an over supply of commodities such as oil and gas. This has meant that the price
of these has fallen and many countries that specialise in producing them have seen low and in some cases negative
growth.
Low External Debt - Countries with low external debt can invest more in education, business and infrastructure to
help their economies grow. Countries with high debt have to pay more servicing debt and therefore have less
money to invest in improving their economy
Possible Reasons for Slower Growth
Austerity Programmes - Austerity usually means higher taxes and lower government spending. As a result aggregate
demand will fall and firms will produce less. With a lower value of output growth will be lower
Exposure to the financial crisis - Some more developed countries were more exposed to the financial crisis eg
countries such as the UK specialise and have an absolute advantage in financial services. As a result our economy
was hit harder as these sectors struggled
Reliance on manufactured exports- Countries that specialise in manufactured exports may face increased
competition from low cost, low wage economies such as China and India. This may see exports fall and growth slow.
ALSO – INTERDEPENDENCE - If global growth slows in the future, countries that export a lot may see a fall in demand
for their products.
The Eurozone is a big market for manufactured products. As the Euro countries struggle there is less demand for
manufactured goods
High external debt burden - Countries with high debt have to pay more servicing debt and therefore have less
money to invest in improving their economy. They have less tax revenue to invest in education, business and
infrastructure to help their economies grow.
Page 7 – Figure 4 – The effects of debt relief in 36 countries
The evidence looks at the impact of debt relief. The data suggests that as countries have
had to pay less debt back and less interest on debt they are able to spend more on poverty
reducing expenditure.
The evidence also looks at poverty
Absolute Poverty – is where someone has insufficient income to live on. They cannot
afford the basic essentials such as food, clothing, shelter/housing. According to the World
Bank absolute poverty is having less than $1.25 to live on.
Relative Poverty - Is poverty defined relative to standards of income in society at a time.
(poverty relative to the situation). In the EU and the UK, we define relative poverty as
being where you earn less than 60% of median income.
Policies to Reduce Absolute Poverty – the case study suggests developing countries may
reduce poverty by spending money on the following
Education and Training - Higher levels of educational attainment and skills mean that a country can produce higher
value goods that generate more export revenue and lead to higher income levels for workers. It will also mean
productivity is higher making firms more competitive. It may also make a country more attractive to FDI which
creates more jobs. All of this raises income levels and improves poverty as people have more to spend on
necessities.
Health - A healthier workforce will be more productive. This may enable workers to gain higher paid jobs and earn
more money, reducing poverty. A healthy workforce also makes a country more attractive to FDI. This enables more
people to be employed, which reduces poverty, as they have more money to spend on food etc. In addition, this
may increase the demand for labour which increases wages and reduces poverty.
Infrastructure - If infrastructure is improved a country will be more attractive to FDI, and costs to produce and
transport goods will be lower, making it more competitive. This will reduce poverty as demand for exports will
increase and more jobs will be created as a result. Employed workers will now have higher incomes and more
money to spend on necessities
Poverty and Economic Growth A successful strategy of poverty reduction must have at its core measures to promote rapid and sustained
economic growth. If GDP rises income can more easily be shared and more jobs are created. In addition,
the Government has more tax revenue to invest in infrastructure. This helps to diversify the economy away
from dependency on the primary sector towards higher value manufacturing. In addition, the government
can invest more in improving education which helps workers earn more money.
Around two-thirds of poverty reduction within a country comes from growth BUT according to the United
Nations – “Economic growth will not produce jobs and cut poverty unless it is inclusive and equitable, and
unless the needs of the poor and marginalized are at the centre of development priorities. When men and
women have equal opportunities and freedoms, economic growth accelerates and poverty declines more
rapidly”. In many developing countries large groups are socially excluded and poverty is perpetuated through
inequalities of power, for example:
Political – where the better off dominate positions of power and ensure the economy works in their
interest
Economic – in some countries workers are bonded to their employers in a kind of slavery
Social and Cultural Practices – that discriminate against groups
Any attempts to reduce poverty need to tackle the above.
Policies to Reduce Relative Poverty - May focus on redistributing income and wealth through
progressive taxation, government spending on benefits (transfer payments) and the use of policies such as
the minimum wage.
Benefits and Costs of Debt Relief
Page 8 – Figure 5 – The Impact of Fairtrade
The evidence looks at how fair trade might help some of the poorest countries in the world
to grow faster
Please see the attached grid for other ways to support growth in developing countries
How Effective is Fairtrade in
supporting growth in developing
countries?
It can certainly be argued that fairtrade
is useful and quite beneficial to some
countries. (see left)
BUT
Many of the poorest countries
may be unable to benefit.
Some may even be
disadvantaged by fair trade if
their products are not fair trade
certified
The market for fair trade
products is relatively small (less
than 1% of total food spending
in the UK) and so the benefit for
developing countries is likely to
be limited
The poorest countries are likely
to need other support, eg aid to
spend on education and
infrastructure, if they are to
boost growth and development
Factor Explanation – What is it? How does it work? How is it supposed to work?
Evaluation Why might it not work? Disadvantages / losers
Aid
Aid can be given in terms of money and in the form of goods (such as machinery, or people with specialist skills). Money can be given as a grant, or as a loan
Can be important for solving economic, environmental and food crises. Without aid the developing country would struggle to rebuild. e.g. after tsunami disaster. Provides foreign capital which can be used for investment and to increase the productive capacity of the economy. This can help the country to produce a higher value of goods and services
If aid is in the form of loans it can lead to countries getting into lots of debt. Servicing the interest on this debt can mean countries getting poorer and not having the money to spend on things such as infrastructure and education. A large % of aid is tied aid. This means it is fixed for certain investment projects which benefits the donor countries. In a sense this is not really aid, but it is classed as Aid. (e.g. building of dams in Argentina) There is a concern aid can lead to dependency. Developing countries come to rely on aid and lose incentives to improve productivity. This depends on the type of aid given. E.g. some aid can be just to improve infrastructure, this is more beneficial than handouts. Aid may not be used in an effective way by the governments in LDCs. It may be used for prestige projects that provide little benefit or may not be used for the purpose given at all Foreign aid has its limitations in increasing productive capacity. Arguably long term growth requires building up trade and new industries
Trade
Economic theory says that international trade is the most efficient way to encourage growth, because each country specialises in producing the goods and services in which it has an absolute advantage.
If trade is free countries should benefit because: They will be able to specialise in producing the goods in which they have an absolute advantage. By exporting these goods to a global market of 7 billion people this will add to economic growth and create employment and boost living standards Developing countries can use tax revenue gained from the above to improve infrastructure and education to fuel further development Trade will allow developing countries to purchase resources they do not have in their own countries or at a lower cost than they would be able to produce themselves Trade will allow countries to access capital and skilled labour
Trade rules favour richer countries. Countries dependent on commodities (coffee, tea, cocoa, food crops) or raw materials are at the mercy of international markets, because the prices of these products are lower than other goods, and tend to -fluctuate dramatically. If they can produce more and increase supply the price will often fall! Some countries are unable to benefit fully from trade due to barriers such as:
Being landlocked
Poor infrastructure
Education Levels An additional problem is that free trade is not equally free. Agricultural subsidies and other trade barriers in the US and the EU prevent poor countries from gaining access to the most important markets.
Aid for Trade Aid for Trade is about helping developing countries, in particular the least developed, to build the trade capacity and infrastructure they need to benefit from trade. It includes grants and loans targeted at trade-related programmes and projects
Aid could be used for education and training to increase labour productivity. This enables the country to become more competitive in the long run. Aid could be targeted to improve infrastructure enabling LDCs to send exports to market in a competitive way. Without this they will struggle to gain from trade Aid may include technical assistance helping countries to produce goods and services more effectively Aid may focus on productive capacity — investing in industries and sectors so countries can diversify exports and build on absolute advantages
Trade isn’t always fair (see above) Aid for trade may not always be effectively targeted. A Traidcraft report states that many Aid for Trade programmes “have only an indirect effect on poor and excluded groups and poverty reduction.” In other words, some critics claim it has not been very effective in reducing poverty due to inequalities of power (In many developing countries large groups are socially excluded and poverty is perpetuated through inequalities of power. – see earlier in revision guide)
Debt Relief/Cancellation
The foreign debt of many developing countries has hindered progress
Interest payments and debt repayments can use up much of a developing countries export revenue limiting economic development A number of countries have had debt cancelled and a number are working towards this. If debt is cancelled governments have more revenue to spend on improving infrastructure and investing in education enabling them to increase productive capacity, attract FDI and develop further. This is a virtuous circle as they should then generate even more revenue.
Not all poor countries have yet been able to benefit from debt cancellation. Some countries were excluded from the original deal because they had done a relatively good job in managing their debts. Many countries where debt has been cancelled are already getting back into debt. No incentive to manage debt if you know you will be bailed out. Debt cancellation doesn’t always benefit the people of the country; it just benefits those in power.
Investment (including help with investment in human capital)
This may take the form of: Investment in a country’s resources or FDI
Investment in a Country’s Resources – for example investment in human capital through education and training can equip people with the knowledge and skills to take advantage of opportunities associated with international trade. Increases productivity making the country more competitive. It may also attract FDI FDI - Foreign Direct Investment Can create employment and lead to a local multiplier effect boosting growth Can lead to a skills and technology transfer where local citizens and firms learn from the MNC and as a result are able to produce their own higher value goods and services. This boosts both growth and economic development
FDI can mean investment falls as countries become reliant on inflows of capital FDI often sees profits repatriated to host countries and the benefits in terms of employment may be less than expected. MNCs have been accused of exploiting countries and their work forces
Fair Trade Schemes
Fairtrade is about better prices, decent working conditions and fair terms of trade for farmers and workers.
The key aims of Fair Trade are to:
Guarantee a higher price to certified producers
Achieve greater price stability for growers
Improve production standards. A grower will be able to receive a Fair Trade licence if it can improve working conditions, better pay and guarantees of environmental sustainability
This should help boost economic output and hence development. It should also reduce poverty and enable families to educate children.
The Fair Trade movement has critics 1. Impact on non-participating farmers: Some claim that by encouraging consumers to buy their products from Fairtrade sources, this cuts demand for farmers in poorer nations not covered by the Fairtrade label 2. Who captures the gains from Fair-Trade coffee? There is some evidence that a large part of the premium price goes to processors not the farmers 3. Others argue that the fundamental causes of poverty are not really addressed by Fairtrade. Greater investment needs to be made in raising farm productivity 4. Some economists believe that the fair trade movement has resulted for example in excess production of coffee, which has driven down world coffee prices.
Non Government Organisations
A non-governmental organization (NGO) is an organization that is neither a part of a government nor a conventional for-profit business. They include charities such as Oxfam
Charities and other NGOs may help developing countries with aid, help, advice, support and technology. In many cases they have a better knowledge of the country or situation than the government of a developed country
Effectiveness is very much dependent on the project or work being done
Page 9 - Figure 6: Europe, the EU and the Eurozone
The evidence identifies those countries that are members of the EU and those that use the
Euro. Questions may focus on the costs and benefits of membership of the EU.
The EU operates as a single market – there is free trade between members, with a common
external system of tariffs. This is called a customs union, and means that any firm within
the EU has access to a much larger potential market. The idea is to make trade as easy
between different countries as it is within a country. So it should be as easy for a British
firm to sell things in France as within the UK.
The single market means:
No protectionist measures on trade between member states (tariffs, quotas, embargos etc.)
Elimination of border controls
Free movement of labour (people can work in any member state without restriction)
Mutual recognition of qualifications
Making taxes, industrial and economic laws the same
Common standards - labelling, environmental, safety Advantages of the EU Disadvantages of the EU
Part of the Single Market – Able to freely access a larger market (over 500 million people)
Specialisation and Economies of Scale
Inward Investment
Free Movement of Labour
One Product Fits All
Higher Economic Growth and Standards of Living
More Competition for UK Business
MNCs drive out local firms
Job Losses
Movement of Jobs and Capital to centre of EU
Movement of Manufacturing Jobs to Low Cost Countries
Here are some features of the EU single market and the advantages and disadvantages to
firms and consumers.
Feature because… because…
Free movement of goods and services
UK Firms - Makes it easier for UK firms to access a larger market (over 500m people). Enabling them to increase sales and profits. Therefore, higher exports and potentially more growth for UK Economy With a larger market UK firms may also be able to benefit from economies of scale which reduces their average costs. UK Consumers - UK consumers may benefit from cheaper products from the EU. This increases living standards and also helps to keep inflation low.
UK Firms - Increases competition for UK firms as it makes it easier for EU firms to access the UK market. Therefore, imports may be higher and this could have led to/ increased our balance of payments deficit. UK Consumers - Jobs may also be lost as a result of increased competition.
Free movement of labour
UK Firms - Enables UK firms to access skilled/unskilled labour, enabling them to increase output. This adds to Aggregate Supply and could enable UK growth to be higher. UK Firms / Economy - It may also reduce inflationary pressures as it will help prevent wage inflation. (by reducing wage inflation it helps reduce costs of production)
UK Consumers / Economy - It may increase unemployment for UK citizens. It may also put pressure on public services such as schools and hospitals. It has been argued that it could lead to higher benefit payments if EU nationals claim UK benefits. However… a recent study suggests economic migrants contribute 11% more to the UK economy than they take out.
Free movement of capital
UK Consumers – allows UK consumers to invest in EU companies and easily open bank accounts overseas. UK Firms – it allows UK firms to more easily raise the money they need to invest and grow so as to become more competitive UK Firms – It makes it easier for UK firms to invest in, own and manage other EU companies
UK Firms – EU firms receive the same benefits which could lead to stronger competition for UK firms (but this competition may benefit the consumer!)
Page 10 – Figure 7. - Lithuania joins the Euro - The evidence looks at
Lithuania’s decision to join the Euro.
Will prices rise or fall in Lithuania as they join the Euro? Short Term – may rise because
business costs rise as they have to change machines and systems to Euros
firms take advantage of situation to “round up” prices Long Term – may fall because
greater price transparency between Euro-using countries
single currency will reduce transaction costs when importing and exporting to Europe
Page 11 – Figure 8 and Figure 9 – The value of the Euro
The evidence shows data on the value of the Euro in both pounds and dollars. The Exchange Rate – is the price of one currency in terms of another
The value of the Euro rose slightly against the dollar for the first part of the period before depreciating (falling) sharply in the second half of the period. Over the whole period it has fallen from 1 Euro = 1.3 dollars to 1 Euro = 1.15 dollars
The value of the Euro initially rose against the £ before falling sharply. Over the whole period the Euro depreciated from 1 Euro = £0.81 to 1 Euro = £0.74
OVERALL – the Euro has fallen / depreciated against the pound and dollar Remember – this means both the pound and the dollar have appreciated / risen / strengthened against the Euro This has implications for Euro countries’ competitiveness and the Eurozone Economies.
Remember SPICED. Strong pound imports cheap exports dear. WPIDEC. Weak pound
imports dear, exports cheap. As the Euro has weakened we can change this to:
WEIDEC – Weak Euro = Imports Dear, Exports Cheap
SO….. A fall in the value of the Euro makes Eurozone countries and firms more
competitive!
The weak Euro makes Eurozone exports more competitive in the UK and the USA.
Goods can be priced lower in £s or $s in order for Eurozone firms to gain the same
amount of Euros. This means Eurozone exports to the UK and USA are likely to rise.
Alternatively, Eurozone firms may keep prices the same in £s or $s and make more
profit.
The impact will depend upon the elasticity of demand for Eurozone exports. If
Eurozone firms sell products with price elastic demand they will see a large rise in
exports as UK and US consumers choose to buy more of these cheaper products
The weak Euro makes imports from the UK and USA less competitive in the
Eurozone. Eurozone consumers may buy less imports from the USA and UK as they
will now be more expensive
Implications for the Eurozone Economies
– more competitive exports and less competitive imports may lead to an improvement
in the balance of payments as Eurozone exports increase and imports fall
– More competitive exports and less competitive imports may lead to some Eurozone
firms taking on more staff as demand increases. As a result, unemployment may fall
- more competitive exports and less competitive imports may lead to a rise in the value
of Eurozone output and higher economic growth
- Eurozone firms that import will lose out as the price of imports rises
- more expensive imports means higher prices for Eurozone consumers and this may
increase cost push inflationary pressures.
REMEMBER – The impact will be the opposite for the UK and USA!
What determines the value of the Euro?
• In a floating exchange rate system, the value of the currency is determined on a
minute by minute basis by free market forces (supply and demand).
1 Euro=
£0.75
Euros
Euros
Euros
Determinants of Exchange Rates - The Supply and Demand for the Currency
• International Trade flows are the major long run influence on exchange rates
• Hot Money (International Capital Movements) can be a major influence in the short
run. Interest rates can be important in this process (see below)
• Interest Rates –Euro int rates down – makes holding Euro bank deposits less
attractive – foreigners demand less euros – investors sell euros - value of Euro down
Why has/is the Euro falling?
The main reason is the supply of Euros has increased. This has led to a depreciation in the
value of the Euro
The Eurozone debt crises – has meant that the £ and dollar has been seen as a
relatively safe currency by investors compared to the Euro. This has attracted
international capital into the UK and the USA from the Eurozone. As a result, the
supply of Euros has increased and the demand for dollars and £s has increased.
The ECB has cut European interest rates. This has led to an increased supply of Euros
as the Euro has become relatively unattractive for investors and as a result the
demand for £s and dollars has increased
Market for Euros –
The supply of Euros has
increased as investors sell
Euros
This has led to a depreciation in
the value of the Euro
From 2013 to 2015 Eurozone interest
rates fell. This may have led to a fall
in the value of the Euro as investors
sold Euros
The exchange rate is one factor affecting competitiveness
Other Factors Influencing Competitiveness - It is important to remember that there are a
number of other influences on competitiveness which may be more important:
Factor Explanation
Wage Costs (and other
relative unit costs)
Some countries have great advantages because their
wage levels are much lower meaning they can produce
products more cheaply. Wages are important when a
lot of labour is involved in the production process
Productivity One way to remain competitive despite higher wages
and other costs is to increase productivity, perhaps
through investment.
Raw Materials Countries such as the UK have to import most of their
raw materials. If prices rise this puts up costs of
production affecting competitiveness. Countries with
their own sources of raw materials are likely to have an
advantage
Government Regulation This can affect competitiveness. Businesses often
complain that regulation costs them money and makes
them less competitive
Education and Skills An educated and skilled work force can help with
competitiveness. Particularly in more high value
sectors. There is a danger that the UK may fall behind
other countries in this respect
Inflation If a country has a higher inflation rate than In other countries it will become less competitive over time. This is because its prices will be rising more rapidly
The Big Question – worth 12 marks
Here are all the previous 12 mark questions we have had
2015 Question - Using information in the stimulus material and your own knowledge of
economics, evaluate the effectiveness of international trade as a method of supporting
economic growth in developing countries - 12 marks
2016 - Possible Big Mark Questions
Using the information in the case study and your own knowledge of economics,
evaluate the extent to which the benefits of international trade outweigh the costs
for the UK economy
Using the information in the case study and your own knowledge of economics,
evaluate the extent to which the benefits of international trade outweigh the costs
for less developed countries
To what extent does globalisation benefit the UK / less developed countries
To what extent has increased trade benefited all countries? Use the evidence from
the data to give reasons for your answer
Using the information in the case study and your own knowledge of economics,
evaluate why some countries benefit more from trade/globalisation than others
Using the information in the case study and your own knowledge of economics,
evaluate the effectiveness of fair trade and other policies in supporting the growth of
less developed countries
Using the information in the case study and your own knowledge of economics,
evaluate strategies to increase the growth of less developed countries
To what extent will Lithuania benefit from joining the Euro
Using the information in the case study and your own knowledge of economics
evaluate the impact of slow growth in the Eurozone on the UK Economy
Examiner’s Report - feedback from previous year. Read this and take note:
Data – don’t just trawl through. Pick out key trends and use the data to illustrate points
Answer the Specific Question! & be specific
Evaluation – prioritise, discuss which might have a larger influence. Look for counter
arguments to points you have made
Conclusion – prioritise or offer something new. Don’t just repeat points
Feedback on Last Question
What can we learn from this?
Responses must be specific with direct reference to the country in the question or
the data from the stimulus material
Develop points fully
Use the stimulus material to support arguments / evaluation. Support though - don’t
just repeat chunks of case study as an answer to the question.
Develop analysis using economic concepts – you need to demonstrate a strong
command of economics and use economic terminology
You need a justified conclusion