Globalisation and Development · Globalisation and Development - This unit is about globalisation...

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

) 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.

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.

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.

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.

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

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

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!)

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

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


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


evaluate why some countries benefit more from trade/globalisation than others


evaluate the effectiveness of fair trade and other policies in supporting the growth of

less developed countries


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

Globalisation and Development · Globalisation and Development - This unit is about globalisation...

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