A2 Economics - F585 The Global Economy 3 June 2014

Reply 180

Cone

Original post by nitin0896

Just a little help needed
1) how would internal devaluation increase productivity of labour force?

It wouldn't letspray gave a good answer,but that's incorrect.

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Reply 181

letsplayray

11

Original post by nitin0896

Just a little help needed
1) how would internal devaluation increase productivity of labour force?

Yeah cone is right, that does seem to be incorrect my bad - the rest of the points are correct tho

Reply 182

Annaaaaaaaa

Can someone explain to me the differences between internal and external devaluations and their advantages + disadvantages?

Reply 183

Cone

Original post by Annaaaaaaaa

Can someone explain to me the differences between internal and external devaluations and their advantages + disadvantages?

Been explained look at the earlier posts

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Reply 184

Nash96

2

Original post by letsplayray

Yeah cone is right, that does seem to be incorrect my bad - the rest of the points are correct tho

It would though wouldn't it? The whole point of internal devaluation is so increase productivity and reduce wages?

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Reply 185

zigglr

18

Has anyone made notes from one of the stimulus companion guides?

Reply 186

letsplayray

11

Original post by Nash96

It would though wouldn't it? The whole point of internal devaluation is so increase productivity and reduce wages?

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No i got a little confused, the main purpose of internal devaluation was to increase price competitiveness of exports globally - achieved by reducing unit labour costs, that were previously rising at a faster rate than productivity.

However the problem in Latvia is that productivity gains remained weak thus rising unit labour costs - so latvia failed in increasing productivity per worker although cutting wages.

As only ways to increase productivity is through - improved capital, investments in education + training which latvia did not do (partly due to fiscal austerity, not sure)

Reply 187

Nash96

2

Original post by letsplayray

No i got a little confused, the main purpose of internal devaluation was to increase price competitiveness of exports globally - achieved by reducing unit labour costs, that were previously rising at a faster rate than productivity.

However the problem in Latvia is that productivity gains remained weak thus rising unit labour costs - so latvia failed in increasing productivity per worker although cutting wages.

As only ways to increase productivity is through - improved capital, investments in education + training which latvia did not do (partly due to fiscal austerity, not sure)

Ah right OK, good explanation, thanks :smile:

Reply 188

Cone

Original post by Nash96

It would though wouldn't it? The whole point of internal devaluation is so increase productivity and reduce wages?

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I think Internal devaluation just involves lowering costs and the government wants to try and increase productivity to maximize the global competitiveness of its exports. I don't think they go together but you may be right

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Reply 189

Sumena

What position and problems are Latvia facing?? And how does this link with the fixed exchange rate policy?? How would I answer this #clueless

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Reply 190

dowen123

1

Original post by Cone

I think Internal devaluation just involves lowering costs and the government wants to try and increase productivity to maximize the global competitiveness of its exports. I don't think they go together but you may be right

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That seems right, it's where the government of a country attempts to improve international competitiveness through lowering unit wage costs and increasing labour productivity rather than relying on a depreciation or devaluation of their exchange rate.

Reply 191

Nash96

2

Original post by Sumena

What position and problems are Latvia facing?? And how does this link with the fixed exchange rate policy?? How would I answer this #clueless

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Before the policy of internal devaluation they had high unemployment, a deficit, and increases in wages above productivity. They fixed their exchange rate to the euro to join the euro, this means they could not alter the value to increase competitiveness so had to pursue a policy of internal devaluation.
After, they had a very high growth rate, surplus on current account and were generally doing well. Then after a while they had high unemployment, re emerged deficit, slowing growth. Emerged as productivity did not rise in line with cuts in wages and so the country did not achieve as big enough increase in competitiveness as they would need to sustain the growth, especially when you compare Latvia's neer with Iceland's.

Someone correct me if I'm wrong!

Reply 192

May-o2q

14

Do we need to learn definition in f585?

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Reply 193

Bloxorus

16

Can anyone give me any advice on the exam technique for the 10 mark questions?
I've come across some practice questions where it asks you to compare internal and external devaluation but I am unsure as to how much analysis I need. I am aware that the general format of an answer should be 3 analysis points then 2 evaluative points, but for a comparison question like this, to what extent do you have to analyse how each of the policies actually work (I.e explaining what they are and how they each increase competitiveness)? And once you've done that, does that count as some of the analysis even if it's not directly answering the question? Would you need to go onto make 3 further points?

I just feel that with questions asking for a comparison, there's too much to write for a 10 marker. It takes me about 5 minutes to explain how each policy works before I actually start the question properly.

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Reply 194

thestudentoffram

Do we need a lot of knowledge outside the curiculum such as knowing about specific
countries .If it is so what kind of knowledge do we need
thank yiu

Reply 195

YAAM

Can anyone explain to me why did IMF give loans to Latvia and what were they used for? Also what is the key idea from extract 3?? thanks guys!!!

Reply 196

sarbear282

Anyone have any ideas what kind of stuff might come up for extracts 1 and 2; or what are the main points that you need to know?
THANKS :smile:

Reply 197

username963570

21

Original post by Bloxorus

Can anyone give me any advice on the exam technique for the 10 mark questions?
I've come across some practice questions where it asks you to compare internal and external devaluation but I am unsure as to how much analysis I need. I am aware that the general format of an answer should be 3 analysis points then 2 evaluative points, but for a comparison question like this, to what extent do you have to analyse how each of the policies actually work (I.e explaining what they are and how they each increase competitiveness)? And once you've done that, does that count as some of the analysis even if it's not directly answering the question? Would you need to go onto make 3 further points?

I just feel that with questions asking for a comparison, there's too much to write for a 10 marker. It takes me about 5 minutes to explain how each policy works before I actually start the question properly.

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i just recently did a past paper set by my teacher where one 10 marker was "comment on the benefits of internal devaluation compared to an external devaluation"

the way i'd do it, is briefly outline what an internal and external devaluation is at the start of the answer, then delve into why internal devaluation may be more advantageous than an external devaluation. So you'd mention how an internal devaluation avoids Cost-push inflation, which is something external devaluation may cause, and then (well what i put anyway) how since an internal devaluation requires the fixing of the exchange rate, then by pursuing ID you would reap the benefits of a fixed exchange rate system (thus increased trade with other nations) which would be beneficial to an economy, particularly if they were in a recession like Latvia was, unlike with external devaluation where potential traders may be worried about the profitability of trade due to the floating exchange rate mechanism, hence ID would be more beneficial in this regard. then your 3rd point would be that countries following ID would probs be able to improve their current account position better than an external devaluation as it involves lowering ULC's and boosting labour productivity, decreasing the price of exports but also boosting the supply of exported goods. (plus ID could be considered more beneficial as it would boost productivity, something ED would not do)

so yeah basically with the analysis points you're always mentioning why it would be better than an External devaluation really, so comparing all the time, not just stating why its good. Thats what i'd do haha, dunno if its right or not (got 7/10 on the ID vs ED question haha although i didn't put half of what ive said above) and then for comment, you're just saying why ID may not be better than ED and why ED might be a better solution.

hope this helps haha, not sure how much of it is right :/ the only point im unsure about here is what diagram to put in. when i did my answer i just used an AD/AS diagram, but there must be a better currency-related diagram to use. if anyone could help me on this point, that would be awesome :smile:

(edited 9 years ago)

Reply 198

username963570

21

Original post by dowen123

That seems right, it's where the government of a country attempts to improve international competitiveness through lowering unit wage costs and increasing labour productivity rather than relying on a depreciation or devaluation of their exchange rate.

This bit is still nagging me quite a bit. What is the difference between a depreciating of an exchange rate and a devaluation? i know a depreciation occurs under a freely floating exchange rate and a devaluation occurs under a fixed exchange rate, but not sure about just how different they are!

Reply 199

Nash96

2

Why is it undesirable to finance a deficit with private sector debt? I sort of know but can't find how to word it :/

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A2 Economics - F585 The Global Economy 3 June 2014

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