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Edexcel Economics Unit 4 Global Economy Discussion Thread (10.June.2014)

The capital account is made up for four bits: the trade in goods, the trade in services, investment income and current transfers

I thought that was current account?

Reply 561

aminkaram

If a question says evaluate the effects of protectionism and my point is that it will distort comparative advantage, can I evaluate by saying a loss of comparative advantage won't be significant because the theory has many problems? i.e assumes no transport costs, constant returns to scale etc...

Reply 562

Razina17

2

Original post by aminkaram

Can someone tell me if there's anything wrong with this piece of analysis:

An increase in protectionism, for example through the imposition of a tariff will essentially make imports more expensive. Since imports are used as inputs to many of the products that manufacturing country's produce this will lead to an increase in the cost of production. Hence, the final cost of the product will increase. Producers will pass the higher costs on to consumers as higher prices, hence leading to cost push inflation.

In evaluation, This will depend on many other factors. Firstly, if the rise in import costs is low producers may choose to absorb the higher costs rather than pass it on to consumers in order to maintain their international competitiveness and revenue. Secondly, if the increased import prices are significant producers may seek alternative domestic sources for their raw materials. This could have a negative effect on the quality of the product but costs and prices would not change.

Thats very good, I don't seem to see anything wrong with it

Reply 563

holly.briggs

6

Original post by Kutie Karen

I think it is the direct capital investment such as FDI and inflows of capital spending by foreign firms.

Thank you

Do you know the significance of the capital account?

(edited 9 years ago)

Reply 564

Farringtonn

1

When is their danger of overshooting and under shooting the inflation target?

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Reply 565

Livaren

Original post by aminkaram

If a question says evaluate the effects of protectionism and my point is that it will distort comparative advantage, can I evaluate by saying a loss of comparative advantage won't be significant because the theory has many problems? i.e assumes no transport costs, constant returns to scale etc...

That's correct, but could you please explain to me some of the problems of the theory? Such as the constant returns to scale and others, I understand the transport cost one.

Reply 566

aminkaram

Can someone please explain any of these few terms to me:
1. Crowding out (both types)
2. The trade gap
3. The foreign exchange gap

+ Does anyone know if we can ever use Rostow's stages of economic growth? It just seems like a useless piece of theory :biggrin:

Reply 567

Dilzo999

19

Original post by Ff96

How relevant are pages 53-55 in the edexcel revision guide? (Role of international financial institutions, role of non government organisations) as it makes no sense to me and I am not able to learn anything new at this point

I skipped them, it's just about the IMF and some other stuff, really they most you would get is a 5 marker.

Reply 568

Livaren

How can a balance of payments deficit be financed?

Reply 569

Razina17

2

Original post by Farringtonn

When is their danger of overshooting and under shooting the inflation target?

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Well if inflation is high then goods would become very expensive therefore consumption would go down, AD will fall and therefore economic growth would fall
If inflation target is too low then people may not spend as much because they may speculate that prices will drop soon so again lack of consumption would happen and therefore decreasing AD

Reply 570

aminkaram

Original post by Livaren

That's correct, but could you please explain to me some of the problems of the theory? Such as the constant returns to scale and others, I understand the transport cost one.

Well the whole point of the theory is that you trade for the goods in which you don't have a comparative advantage because others can produce it a relatively lower cost than you. But if the cost of transporting the good over to your country is greater than the reduced cost of the other country producing it then the net cost of production has increased. That's the transport one.

The constant returns to scale one means that in the short run the law of diminishing returns is ignored and in the long run economies and diseconomies of scale are ignored. Naturally these are wrong assumptions.

Another good one is increasing opportunity costs. Say for example germany ends up making so many cars that they run out of suitable resources for it. So they have to start using resources which are more suited for agriculture to make cars.

Reply 571

Razina17

2

Original post by Livaren

How can a balance of payments deficit be financed?

Contractionary fiscal policy where you increase tax and decrease public expenditure. You can evaluate that through the laffer curve
There is also FDI's, government borrowing from other countries and thats all I can think of

Reply 572

aminkaram

Original post by Livaren

How can a balance of payments deficit be financed?

There is no such thing as a balance of payments deficit. The name says it all, it's Balanced!!! A deficit of the current account Must be financed by a surplus of the financial account or vice versa

Reply 573

Dilzo999

19

Original post by aminkaram

Can someone please explain any of these few terms to me:
1. Crowding out (both types)
2. The trade gap
3. The foreign exchange gap

+ Does anyone know if we can ever use Rostow's stages of economic growth? It just seems like a useless piece of theory :biggrin:

Crowding out: This is where private sector spending falls when there is an increase in public expenditure. There are 2 types of crowding out.
Resource crowding out - This is where there are insufficient resources for the private sector during full employment.
Financial crowding out - This is when public expenditure or tax cuts are being financed by government borrowing thus increasing the demand for loanable funds increasing interest rates. This means that the private sector will have higher costs due to the price of the loan increasing thus deterring new investment.

Crowding out is usually used as an evaluation to fiscal policy (expenditure) and on debt.

Foreign exchange gap - This is where there is a shortage in the amount of foreign currency. This means that it will be harder to import necessary capital from overseas thus resulting in a constraint on growth. Can be caused by dependence on export earnings and with things like servicing debt and capital flight.

Not sure what trade gap is? Is it just a deficit/surplus on B.O.P?

Reply 574

Livaren

Original post by aminkaram

Can someone please explain any of these few terms to me:
1. Crowding out (both types)
2. The trade gap
3. The foreign exchange gap

+ Does anyone know if we can ever use Rostow's stages of economic growth? It just seems like a useless piece of theory :biggrin:

Financial crowding out is when the public sector borrows money from banks to finance public sector investment. This increases the demand for loans and as a result the cost (interest rate) this makes it harder/more expensive for firms to finance investment.

Resource crowding out is when spending by the public sector uses up resources e.g. graduates employed, this means these resources cannot be used by the private sector. Obviously this is more of a problem when the economy is near full capacity.

The trade gap is another name for trade deficit.

The foreign exchange gap is when a country has a lack of foreign exchange reserves to finance imports. This is because they depend on the exports usually of primary products which yield low values and are dependent on importing capital equipment/servicing their debt and also due to capital flight.

The thing is with Rowstows model is that it states that the savings gap should be filled and the savings ratio should be between 10-15% of GDP otherwise the country cannot "take off"

Reply 575

Dilzo999

19

Original post by aminkaram

There is no such thing as a balance of payments deficit. The name says it all, it's Balanced!!! A deficit of the current account Must be financed by a surplus of the financial account or vice versa

I'm kinda unsure on this. Why does this have to be the case?

Reply 576

holly.briggs

6

Original post by Farringtonn

When is their danger of overshooting and under shooting the inflation target?

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Undershooting the inflation target- can lead to deflation
Deflation is the bad for the economy because businesses earn less profits, so less disposable income, to invest so if this is persistent in the LR can lead to decrease in standard of living, unemployment and firms leaving the market.

Also can lead to negative multiplier effect.

Some people may postpone buying goods and services because they expect that prices will fall. Because of low demand, it actually causes a plummet in the price level meaning that more business go bust.

Less government revenue, Fall in consumer confidence and uncertainty.

Overshooting is bad too.

Inflation erodes real wages, so people can afford to buy less in real terms.
High costs for firms and businesses, meaning that they have to let off some workers.
Rise in commodity prices leads to cost of living crisis and an increase in relative/absolute poverty because people are unable to afford basic needs.
Decline in purchasing power.
If inflation is higher than other countries, it makes us less internationally competitive.
Uncertainty in the economy?

Reply 577

Livaren

Original post by aminkaram

There is no such thing as a balance of payments deficit. The name says it all, it's Balanced!!! A deficit of the current account Must be financed by a surplus of the financial account or vice versa

Sorry didn't see Dilzo already answered your questions and what if the surplus on the financial account is not enough to finance the deficit?

Reply 578

tashdf

Does anyone know how the marks are allocated for questions a-e in the data response questions in terms of KAA and evaluation? :smile:

Reply 579

Farringtonn

1

Original post by holly.briggs

Undershooting the inflation target- can lead to deflation
Deflation is the bad for the economy because businesses earn less profits, so less disposable income, to invest so if this is persistent in the LR can lead to decrease in standard of living, unemployment and firms leaving the market.

Also can lead to negative multiplier effect.

Some people may postpone buying goods and services because they expect that prices will fall. Because of low demand, it actually causes a plummet in the price level meaning that more business go bust.

Less government revenue, Fall in consumer confidence and uncertainty.

Overshooting is bad too.

Inflation erodes real wages, so people can afford to buy less in real terms.
High costs for firms and businesses, meaning that they have to let off some workers.
Rise in commodity prices leads to cost of living crisis and an increase in relative/absolute poverty because people are unable to afford basic needs.
Decline in purchasing power.
If inflation is higher than other countries, it makes us less internationally competitive.
Uncertainty in the economy?

Thankyou!! :biggrin:

when are they likely to undershoot/ overshoot, when interest rates are high or low?

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Edexcel Economics Unit 4 Global Economy Discussion Thread (10.June.2014)

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