M05 - M05 P1 3 a Describe the factors which might cause a...

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M05 P1 3. a) Describe the factors which might cause a change in a country’s terms of trade. [10] - definition of terms of trade - meaning of change in the terms of trade Factors: - Δ international competitiveness - Δ supply and demand, AS/AD - Δ global econ growth - protection/subsidies - Δ access to markets - Δ wage - inflation - technology - supply shocks in commodity markets - productivity - Δ exchange rates - costs of raw materials b) Evaluate the significance for less developed countries of a deterioration in the terms of trade. [15] - definition of LDC - implications for debt and debt servicing - explanation of deterioration in terms of trade - impact on exchange rate - distinction between short and long run - impact on living standards - “getting nowhere fast” – exporting more to buy same quantity of imports - the need for long term structural change - significance of elasticity of demand for imports and exports - overall evaluation - balance of payments effects - degree of dependence on overseas trade M05 P2 3. What are the likely consequences of deflation for a country’s economy? [10] - definition of deflation Consequences might include: - deflation (like inflation) disrupts the price mechanism so that people are confused about the true value of things - if consumers delay spending in anticipation of falling prices economic activity falls, UE increases - businesses see profits fall; as they do so dividends and investment returns fall and so share prices fall - business insolvencies increase, productive investment falls – also leading to falling output and increased UE - the principle problem of deflation is that it leads to a rise in the real value of debt. In the early stages low interest rates and low prices encourage borrowing but as the real weight of the borrowing is recognised so borrowing is reduced - monetary policy can prove ineffective when interest rates (nominal) are already low ( e.g. of Japan and Europe). A good clear definition of deflation can earn up to [4 marks] . To achieve level 4 a candidate must include either an in-depth discussion of two consequences or a wider coverage of the impact. 5. Why might a government prefer to negotiate Voluntary Export Restraints (VERs) rather than impose tariffs as a means of restricting international trade? [10] - definition of tariffs and VERs - graph Factors: - a VER provides the foreign exporter with a profit - government may want to avoid a tariff or quota war with retaliation - a VER is a way to achieve trade restrictions to protect domestic industries but with some sort of compensation to encourage the foreign country to accept that situation and not retaliate - VERs can be entered into legally - most tariffs are now outlawed; VERs reduce transparency
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M05 P3 3. Tax cuts 1 Given that governments must raise money through taxation, how can they do so at the least cost to the economy? Usually, economists prefer taxes that change the relative prices of goods and services as little as possible, and so cause the minimum distortion to people’s spending and investment decisions. 2
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This note was uploaded on 02/12/2010 for the course ECON 201 taught by Professor Smith during the Spring '10 term at Whittier.

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M05 - M05 P1 3 a Describe the factors which might cause a...

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