What conditions are necessary for a devaluation to improve the BOP? Can a small open economy successfully devalue?
Nicola James Mary Gregory Week 2: Devaluation What conditions are necessary for a devaluation to improve the BOP? Can a small open economy successfully devalue? Devaluation happens when official action is taken to raise the domestic currency price of foreign currency under a fixed exchange rate environment. Under fixed exchange rates, central banks buy and sell foreign currency to peg the exchange rate. They do this by running down or adding to their reserves of foreign currency. This essay will explore the running of a devaluation and conclude that the Marshall-Lerner condition needs to be satisfied in order for a devaluation to improve the BOP. From the end of WW1 until 1973 many of the major countries in the world had fixed exchange rates. For example in the 1960s, the French central bank, the Banque de France was set at 4.90 FF (French Francs) per U.S. dollar and the German central bank, the Bundesbank was set at 4 DM (Deutche Marks) per U.S dollar. These currencies among most other major currencies were made flexible in 1973. However there are still some smaller countries with fixed exchange rates. The Balance of Payments (BOP) is the record of the transactions of the residents of a country with the rest of the world. The BOP is split into two accounts. The current account describes the transactions in goods, services and transfers. The capital
Governments set economic objectives - Discuss the relative importance of each of these objectives - Can governments meet all these targets at once
Q. Governments set economic objectives. Discuss the relative importance of each of these objectives (discussed so far). Can governments meet all these targets at once? The economic objectives the UK government aims to achieve, which have been discussed so far, include maintaining a low level of unemployment, price stability and steady level of inflation and high yet sustainable levels of economic growth. Each economic objective will be analysed in turn and discover its importance in the UK economy. Unemployment measures the amount of people that are actively seeking employment at a point in time. Typically in the UK, unemployment is measured by the number of people claiming benefits, even though there are other techniques of measuring unemployment. Equilibrium in the labour market exists when the demand for labour is equal to the supply of labour. Figure 1.0 - Labour market in equilibrium Even in equilibrium, there may be some level of unemployment, such as frictional and search unemployment, seasonal unemployment and structural unemployment. Sometimes, the labour market moves out of the equilibrium. Figure 2.0 - Disequilibrium in the labour market In Figure 2.0, the wage rate is above the market clearing wage rate, P, thus, causing fewer workers to be demanded by employers because the wage rate is too high, yet an extension in the supply of workers because
SMOKERS COST COUNTRY BILLIONS OF POUNDS PER YEAR A) Why does smoking lead to external cost Smoking is an example of a demerit good. Demerit goods are goods which are overprovided by the government (people feel that they are provided in great quantities and there should be less of them); it creates large quantities of negative externalities. The fact that they are demerit goods is a reason that smoking costs the country billions of pounds a year. External costs are costs which affect society as a whole as opposed to just the individual. Smoking leads to external costs because it affects the health of the individual. As a result of this the NHS spend more time treating patients with smoking-related health problems when they could be treating patients with far more serious health problems such as Cancer. Waiting times in the NHS are much longer, especially in the A & E department as a large number of those patients are there with smoking-related health problems such as mouth and lung Cancer. Another external cost of smoking is that it creates large amounts of street litter, not only does this make the environment look bad but it also has spill over effects on another party for example workers of the council that are employed to clean litter of the streets. Smoking as well as affecting the health of the individual can also affect the health of others in the form of passive
What are the economic effects of inflation? Inflation is defined as a persistent increase in the general price level. It can take the form of creeping inflation of several percent per year. This is viewed as healthy for the economy because it means that some level of economic growth is occurring in the economy. On the other hand, hyperinflation can take place in an economy. There is no figure at which inflation can be deemed hyperinflation but a figure of annual inflation as high as 100% could be regarded as such. The economic effects of each of these are different so it will be important to note that I will be looking at creeping inflation. Inflation affects a large number of economic factors within the economy such as unemployment, growth, the balance of payments, distribution of wealth and taxation revenues. There are two different causes of inflation. It can be caused by excess demand in the economy. If this occurs it means that too many people are chasing too few goods. It causes a shift to the right of the demand curve. This is not a problem if there are necessary resources to cope with the extra demand and create more goods accordingly. However, if the economy is already operating at full employment or if there is high factor immobility then no more goods will be able to be produced and demand-pull inflation will occur. The other type of inflation cost-push
Economic Environment Coursework . (i) An increase in immigration would affect the British production possibility curve as it would force the curve to move to the right. An increase in immigration would lead to an increase in available labour and so Britain would be able to produce more goods. (ii) A major war would affect the production possibility curve as it would move the curve towards producing more weapons in order to fight. This could also have a reverse affect on the curve as soldiers will be needed in war therefore less labour would be available to produce goods. (iii) A decrease in unemployment would affect the production possibility curve as it would move the curve to the right. This is because there would be an increase in production of goods as there has been an increase in the workforce. (iv) The discovery of a new oilfield would move the production possibility curve to the right. This is because an increase in oil would improve the country's GDP, and would lead to an increase in production. 2. Traffic congestion is a big problem to deal with as many people use and need to use their vehicles daily. An obvious suggestion to try and prevent congestion would be to introduce a traffic congestion charge as seen recently in London, and to decrease the price of public transport, (which can be generated by the money obtained from the traffic congestion charge
Summary of Article one. "Back to Basics Inflation" This article on inflation describes the effect of inflation on the economy as a whole and on the effects on Money. The article gives a definition of inflation as the persistent rise in the general level of prices. The first point explained is about the inflation rate in 1970, which showed prices had risen to 26.9%. This would prove a great problem to the public if there were not a raise in real income as most necessities would not be affordable. Also due to this rise in prices Savers suffered due to low interest rates and those who borrowed money had to pay less for their debts. The article then talks about the effects of inflation on the functions of money; it explains that the function of money was to replace the barter system where commodities were exchanged in terms of another product or service. It explains that too much money causes very rapid inflation and that as inflation raises the purchasing power of the currency decreases. In turn it makes it harder for firms to decide whether or not real profits have been reached as if there is a rise in revenue the firm does not know whether it is due to an increase in sales or because of the rise in prices for the resources. The article then talks about the Causes and consequences of inflation; inflation is caused by the rise in aggregate demand through a rise in government
Demonstrate how an appropriate use of fiscal policy can achieve a target level of income. If a government can achieve such a target level of income, explain why unemployment has not been at a permanently low level in the UK in the last two decades
Demonstrate how an appropriate use of fiscal policy can achieve a target level of income. If a government can achieve such a target level of income, explain why unemployment has not been at a permanently low level in the UK in the last two decades Certain policies are used to tackle the problem of inflation within an economy. One such policy is known as Fiscal policy. The current economic position of an economy is altered by an increase or a decrease of government expenditure. The essay will introduce fiscal policy, and will explain how the influence of this policy can help alter the general level of income of an economy. If over a number of years, government expenditure is greater than income from the national level of taxes, then the economy reaches a level of national debt. The economy will then incur a fiscal policy. A budget deficit will try and compensate both the level of taxes and the government expenditure. A target level of income is achieved by the government expenditure being lower than the amount of taxes earned by the government. Also, if the general public are spending more money than they are earning then target levels of income will again need to be reached. This is known as Public-sector Net Cash Requirement. The target level of income is achieved by implementing a number of various methods. National and public sector debt can be reduced by what
The Phillips Curve Economists agree that unemployment and inflation are two of the major macroeconomic problems of the twentieth century. If a relationship between the two existed then this would be a major break through for the macro management of the economy. Phillips' work was empirical - started with evidence and worked towards a theory. The causation for the Phillips theory was that the level of unemployment caused the rate of change in money wages to be what it was. 'What economic theory lies behind this?' As unemployment decreases the available pull of labour goes down. This means that resources become increasingly scarce and workers can push for higher wage rates. Or as unemployment decreases more people have more income and spend more causing Aggregate Demand to increase leading to Demand Pull Inflation. What Phillips' curve did propose was that an inverse relationship between unemployment and the rate of change in money wages existed. 'As a piece of historical economic research the Phillips curve can be seen as a success. However can it be relied upon as a piece of economic theory?' No one suggested that the curve should have been in a different place. However it could have been argued that for the first period which he studied the data, 1861 - 1913, were too unreliable. After all, for most of that time there were no government figures for unemployment and many
a) Explain what is meant by transaction, precautionary and speculative demand for money? (10M ) The demand for money refer to the desire to hold money; to keep your wealth in the form of money, rather than spending it on goods and services or using it to purchase financial assets such as bonds or shares. The preferences for money over other kinds of assets is known as liquidity of preference. Liquidity describes the readiness with which an asset can be converted into cash without any significant loss in value. Wealth held in the form of money provides people with the maximum freedom of action, because it is readily convertible into any other type of asset. It is usual to distinguish three reasons why people want to hold their assets in the form of money, which are transaction, precautionary and speculative motives. The transaction motive refer to the desire to hold money in order to make purchases of goods and services. The transactions demand for money is positively related to real income and inflation. As an individual's income rises or as prices in the shops increase, he/she will have to hold more cash to carry out his everyday transactions. The quantity of nominal money is therefore proportional to the price level in the economy. Since people only receive money at intervals (e.g. weekly or monthly) and not continuously, they require to hold balances of money in cash or
Inflation vs. Unemployment - In what way might there be a trade off between inflation and unemployment? Is it possible for a country to have high levels of inflation and unemployment at the same time?"
Inflation vs. Unemployment "In what way might there be a trade off between inflation and unemployment? Is it possible for a country to have high levels of inflation and unemployment at the same time?" November 1996 exam. As an extension to what we are doing in class, this essay question was assigned to us. In this essay I will define some terms first so that it will help clarify the essay question and also help my respond to the question. The first technical word I can find in the question is a trade off. What is a trade off? A trade off is when one thing plays against each other in a sacrifice manner. The question enquires if there is a trade off between inflation and unemployment, here there are tow different opinions. The Keynesians believe that there is a trade-off between the two, and Monetarists believe that inflation causes unemployment. In this essay I will look at the Keynesians theory. Unemployment is the number of people without a job. Unemployment can be measured in a number of different ways. The main official measure in the UK is the claimant count. This is the registered number of people between the ages of 18 and 60 receiving an unemployment-related benefits such as welfare. The unemployment rate is the number of people on the claimant count expressed as a percentage of the labour force. The labour force includes all those who are economically active.