Questions:
1. A country is less productive at making everything would not expect to enjoy gains from international trade, do you agree? Explain with reference to both theory and empirical examples where appropriate?
2. Low economic growth is usually accompanied by rising unemployment. Explain why, in a period of low economic growth, unemployment is likely to increase?
3. Many believe that the main objective of the government economic policy should be to increase the productivity and economic growth. Discuss the difficulties that the government is likely to encounter when attempting to boost the rate of growth of the UK economy?
4. The deficit on the current account of the balance of payment was lower in 2011 than it was in 2010. Explain two factors, other than a fall in the value of the pound, which might help to reduce the size of the deficit on the current account of the UK balance of payment?
5. Economic policy makers hope that UK trade with the rest of the world will help to rebalance the economy and boost aggregate demand. Using your economic knowledge, assess the impact on the performance of the UK economy of a significant increase in export and a reduction in imports of goods and services?
6. Most people would say that the ending of the BT telephone monopoly, and competition in the telecommunications market, have been beneficial. However, Britain’s railways show why some monopolies should not be replaced by a number of competing firms. Evaluate the view that consumers are always better off and procedures are always worse off if monopolies are broken up to encourage as much competition as possible?
Answers:
1. A country is less productive at making everything would not expect to enjoy gains from international trade, do you agree? Explain with reference to both theory and empirical examples where appropriate
There are two reasons for which the countries engage in the international trade in order to gain advantage from the trade (Dunn and Mutti, 2004). It is seen that the countries trade as they are different from the other in terms of operation. According to the theory of David Ricardo, the countries engage in the trade so that they can benefit from the differences that are there by trying to reach an agreement, where each country specialises in a particular product. The second reason is that the countries try to reach the economies of scale in the production process (Salvatore, 2001). In the theory it is said that the all the countries specialises in production of at least one product, and the country need to produce that product in abundance so that it can trade that product with those in which it lacks expertise. Thus it is seen that the country has a comparative advantage in the production of the goods if only there are low opportunity cost in the production process of that particular good in that country. Thus a country which is less productive can gain from the trade.
2. Low economic growth is usually accompanied by rising unemployment. Explain why, in a period of low economic growth, unemployment is likely to increase
Unemployment is the result of low economic growth in the country. In a country where there are low economic growths, there is a decline in the production process (Oner, 2013). The lowering in the production process leads to the decline in the demand in the labour forces. The decline in the requirement of labour in the production process leads to the increase in the unemployment rate. It is seen that if there are equality in the growth in the labour force, and the GDP growth along with the presence of productivity growth, it is seen that more people will enter the labour force than that are required in the production of the required goods and services. It will lead to the fall in the share of the labour force (Economicsonline.co.uk, 2015). The consequence is the fall in the employment rate. It is seen that if the GDP growth exceeds the combined growth rates of both the productivity that is the potential output and the labour force, then the unemployment rate will fall in the long run of the country.
3. Many believe that the main objective of the government economic policy should be to increase the productivity and economic growth. Discuss the difficulties that the government is likely to encounter when attempting to boost the rate of growth of the UK economy
The economic growth of the country is at an average of 2.5% per year. If there is an increase in the growth rate then the people will witness a faster growth in the financial standard of living. Thus the people will be able to consume more goods and services. In order to increase the economic growth and the productivity of the country the country faces a lot of problems. There are technology related problems that the country faces as there are shortages of machinery to produce the excess output. Problem may arise from the labour forces as there may be shortage of skilled labour in the country thus it can lead to low production. More over it is seen that the lack or deficit in the raw materials in the country can cause decline in the production of the goods (Elwell, 2005). Apart from these if there are lack of capital in the reserves of the country, production can decline. Thus these are some of the factors that the country faces while trying to boost the economy of the country.
4. The deficit on the current account of the balance of payment was lower in 2011 than it was in 2010. Explain two factors, other than a fall in the value of the pound, which might help to reduce the size of the deficit on the current account of the UK balance of payment
The trade in the goods as well as services and the income from the investment, employment as well as transfer are the reasons for which there can be deficit in the current account of the balance of payment. UK has negative trade n the goods. Thus it can be seen that the trade is expensive as there are more imports than the imports. The reason for the rise in the imports is that the imports are cheaper compared to the exports. So for these reason the people are able to buy the imported goods at a much cheaper rate. Thus the export becomes more expensive and competitive.
If there are rise in the spending capacity of the people, there is rise in the imports of the country. Thus the current account will deteriorate (Krugman and Obstfeld, 2000). The current account deficit can be minimised if there are increase in the capital flow of the country. Thus the country needs to attract foreign investors, so that the deficit in the current account can be reduced.
5. Economic policy makers hope that UK trade with the rest of the world will help to rebalance the economy and boost aggregate demand. Using your economic knowledge, assess the impact on the performance of the UK economy of a significant increase in export and a reduction in imports of goods and services
There was deficit in the goods of UK. From the time of the acceleration of the process of de-industrialisation, in the early 1980s, the country has a deficit in the goods. It is seen that UK manufactures gods but they primarily are net importers of the manufactured goods. Thus the government needs to implement some changes so that there are increase in the export of goods and reduction in the import, in order to reduce the current account deficit (Stepanovic-Petrac, 2008). In order to do so, the country should tight the monetary policy as well as fiscal policy, and reduces the spending of the consumers. For example it can be seen that, if there are reduction in the disposable income of the people, there will be less spending on the imports. The devaluation of the exchange rate can make the exports cheaper, and making the imports expensive. Thus the country need to follow policies like this in order to increase the export, thus making rebalance in the economy and in turn boost the aggregate demand.
6. Most people would say that the ending of the BT telephone monopoly, and competition in the telecommunications market, have been beneficial. However, Britain’s railways show why some monopolies should not be replaced by a number of competing firms. Evaluate the view that consumers are always better off and procedures are always worse off if monopolies are broken up to encourage as much competition as possible.
In a monopoly market it is seen that there is only seller in the market who is the dictator of the prices in the market. Thus a monopoly market is called a price setter. The monopolists have the control over the market and have influence on the prices of the products. The seller controls as there are no possible competitors in the market, thus they enjoy the monopoly. In case of a monopoly market the consumers are the worse offs, as they have to pay a large amount of money in order to purchase a product which would have been low priced in a perfectly competitive market (Dubey and Sondermann, 2009).
In a perfectly competitive market it is seen that the consumers are at better off as thy set the prices and the companies are the price takers. It is seen that in this market there are large number of buyers and sellers. Thus the consumers are in better off position as they are able to bargain and set the prices, for the products according to the demand in the market. Thus the consumers are in worse off situation.
References
Dubey, P. and Sondermann, D. (2009). Perfect competition in an oligopoly (including bilateral monopoly). Games and Economic Behavior, 65(1), pp.124-141.
Dunn, R. and Mutti, J. (2004). International economics. London: Routledge.
Economicsonline.co.uk, (2015). Balance of payments. [online] Available at: http://www.economicsonline.co.uk/Managing_the_economy/Balance_of_payments.html [Accessed 7 May 2015].
Elwell, C. (2005). The U.S. trade deficit. [Washington, D.C.]: Congressional Research Service, Library of Congress.
Krugman, P. and Obstfeld, M. (2000). International economics. Reading Mass.: Addison-Wesley.
Oner, E. (2013). Simultaneous Effects of Supply and Demand Elasticity with Market Types on Tax Incidence (Graphical Analysis of Perfect Competition, Monopoly and Oligopoly Markets).International Journal of Economics and Finance, 5(2).
Salvatore, D. (2001). International economics. New York: John Wiley.
Stepanovic-Petrac, Z. (2008). Bretton Woods 2 system and US balance of payment deficit.Medjunarodni problemi, 60(1), pp.116-136.
