A-Level Economics Macro Essay Plans

Contents

1. What is better. Fixed or floating exchange rate system
2. ⁠What is the best policy to fix a current account deficit?
3. ⁠Is a current account deficit always that bad? Yes or no
4. ⁠What is better? A low or a high currency?
5. ⁠What is better? Free trade or protectionism?

Fixed Exchange Rate vs Floating Exchange Rate

Fixed Exchange Rate: we can buy and sell reserves of our currency or a different currency

• we can control our exchange rate at any time
• we can achieve a current account balance of payments quite easily
• we would not be harmed by supply-side economic shocks
• can still use fiscal policy to control other macroeconomic objectives

THESE GUYS CAN'T CONTROL INFLATION, UNEMPLOYMENT, ECONOMIC GROWTH VERY EASILY THROUGH MONETARY POLICY

BUT CAN CONTROL BALANCE OF PAYMENTS VERY EASILY

Floating Exchange Rate: the value of your currency is determined by demand and supply only

• we can still somewhat control our currency through changing our interest rates
• for example, if we lower interest rates, people may sell the £ to save in a different currency with higher interest rates in that country (supply shift to the right)
• in the UK, we can use interest rates freely for monetary policy to control inflation
• allowing value of currency to change freely due to supply and demand means that current account deficits can get automatically corrected

THESE GUYS CAN CONTROL INFLATION, UNEMPLOYMENT, ECONOMIC GROWTH VERY EASILY THROUGH MONETARY POLICY

BUT CAN'T CONTROL BALANCE OF PAYMENTS VERY EASILY

⁠What is the best policy to fix a current account deficit?

1. LOWER THE EXCHANGE RATE
   1. lower the value of the currency
   2. everything becomes relatively cheaper in the UK
   3. amount of imports decreases
   4. amount of exports increases
   5. AD rises: other 3 macro objectives
      1. EVALUATION: MARSHALL-LERNER CONDITION
      2. a currency depreciation only improves balance of payments if exports and imports are ELASTIC
      3. J-curve: a current account deficit gets WORSE before it gets better.
      4. One of the things we import is OIL
      5. increases cost of production
2. PROTECTIONISM E.G. TARIFFS
   1. TARIFF DIAGRAM
   2. a tariff is a tax on imports
   3. world supply is perfectly ELASTIC because there are millions of buyers and sellers in the whole world
   4. supply shifts left because of the tax (tariff)
   5. imports fall from Q1Q2 to Q3Q4.
   6. domestic sales increases from 0Q1 to 0Q4.
   7. reducing imports
   8. so therefore surely the BoP will improve
      1. EVALUATION: protectionism leads to RETALIATION.
      2. if i stop importing from you, you might put a tariff back on me
      3. you might stop importing from me
      4. my EXPORTS WOULD ALSO GO DOWN?
      5. tax revenue
      6. domestic sales goes up
      7. creates jobs
      8. specialisation
3. SUPPLY-SIDE POLICIES
   1. policies that increase competitiveness, productive potential, LRAS in an economy
   2. infrastructure spending
   3. greater productivity
   4. greater quality and greater quantity and lower costs
   5. more COMPETITIVE
   6. our exports go up
   7. very good to prevent current account deficits in the long term
   8. there are huge time lags and huge opportunity cost
4. CONTRACTIONARY FISCAL POLICY
   1. increase tax rates
   2. lower government spending
   3. disinflation
   4. lower confidence

Is a current account deficit always that bad? Yes or no

1. NO:
   1. a current account deficit could be a small % of GDP
   2. AD = C + I + G + (X-M)
   3. = 100000000 + 10000000 + 0 + -20
   4. a current account deficit may be a sign that a country is already doing well
   5. a boom: low unemployment, high incomes
2. NO:
   1. a current account deficit can automatically fix itself
   2. imports would be high and exports would be low
   3. we are selling the £ a lot
   4. there is low demand for the £
   5. E.R diagram
   6. the value of the £ falls
   7. this would cause more exports and less imports
3. YES (if it is persistent): they are always importing more than they are exporting
   1. over-dependence on imports
   2. vulnerable to economic shocks (China increase their currency)
   3. cost-push inflation
   4. SRAS falling to the left
   5. RECESSION
   6. WEAK SUPPLY-SIDE

What is better? A low or a high currency?

1. Low currency 😄
   1. exports should be high
   2. imports should be low
   3. AD should be high
   4. low unemployment
   5. high economic growth
   6. MARSHALL LERNER CONDITION: a depreciation only improves BoP if imports and exports are inelastic
   7. supply-side
2. High currency 😄
   1. really costs of production
   2. SRAS to shift to the right
   3. no risk of any inflation
   4. creates jobs
   5. real GDP increases

What is better? Free trade or protectionism?

Free Trade:

1. free trade means we are making use of COMPARATIVE ADVANTAGE
   1. i import cars
   2. i export trucks
2. EVERY SINGLE country has a comparative advantage in something
3. when u have a lower opportunity cost of producing a good
4. then u specialise in what u are LEAST BAD AT
5. learning by doing
6. greater total output

Protectionism:

1. give tariffs as an example
2. tariffs diagram
3. IMPORTS GO DOWN from q1q2 to q3q4
4. domestic sales goes up
5. create jobs
6. HOWEVER: risk of retaliation

Protectionism argument 2:

1. free trade and a free exchange rate has one risk
2. if you have a weak supply side
3. and you are engaging in free trade
4. you have the risk of a current account deficit
5. persisistent?
6. you are also very vulnerable to shocks if you just specialise in one good or service.
7. you can evaluate it by saying that shocks are part of any economy, and state that the free trade and free markets provide the mechanisms to re-specialise again and again (signal ration incentive market mechanism)