Practise balance-of-payments accounts, current-account adjustment, exchange-rate causes and effects, currency intervention and international competitiveness.
Between 2022 and 2023 Finland recorded an increase in the capital and financial account deficit of its balance of payments.
Ceteris paribus, which one of the following is the most likely reason for this increase in Finland's capital and financial account deficit?
An increase in public sector borrowing and an increase in public sector debt
An increase in outflows from the primary income component of Finland's balance of payments
A decrease in inward foreign direct investment (FDI) and portfolio investment
A decrease in the value to the EU and an increase in the value of imports from the EU
In 2021 Singapore's surplus on its current account of the balance of payments was over $60 billion.
Evaluate possible causes of a current account surplus. Refer to a developed country of your choice in your answer.
In 2022 Türkiye's deficit on the current account of the balance of payments was $ 48.75 billion. In the same year, Canada's deficit on the current account of the balance of payments was $ 6.65 billion.
Evaluate measures that could be taken to reduce a current account deficit on the balance of payments. Refer to a country of your choice in your answer.
In 2019 the current account deficit on the balance of payments in Turkey was US$47.4 billion and in Argentina it was US$31.3 billion.
Evaluate the disadvantages of a current account deficit to a developing country of your choice.
In 2022 the value of Japan's currency, the yen, fell by 35% against the US dollar.
Japan's central bank intervened in the currency markets to increase the external value of the yen. This intervention cost the central bank $20.8 billion. Evaluate policies that can be used to prevent a country's exchange rate from depreciating. Refer to a developed country of your choice in your answer.
Sources for use with Section B
The economy of Turkey
Figure 1 Central bank base interest rate, January 2018 to December 2020
Figure 2 Rate of inflation, as measured by the Consumer Price Index (CPI), January 2018 to December 2020
Figure 3 Turkish lira–US dollar exchange rate*, January 2018 to December 2020
Extract A Currency depreciation
Turkey’s President, who controls the Central Bank of Turkey, is an opponent of high interest rates. He dismissed the Central Bank’s previous Governor in 2019, complaining that “he would not follow instructions on interest rates”. The Central Bank made a series of interest rate cuts after a new Governor was appointed. The President wanted a reduction in interest rates to encourage borrowing by businesses and consumers in order to stimulate Turkey’s rate of economic growth.
By contrast, some economists urged the Central Bank to raise interest rates to slow the pace of credit growth and to avoid a currency crisis. They argued that following the reduction in base interest rates, there was a further fall in the exchange rate of the Turkish lira against the US dollar. Turkey’s large current account deficit and capital flight have also contributed to the depreciation of the Turkish lira. Attempts to increase the external value of the lira while keeping interest rates low have reduced most of the Central Bank’s foreign currency reserves. Economists warned that the risk of a financial crisis in Turkey was growing.
In response, the new Governor of the Central Bank of Turkey raised the base interest rate. This increase indicated that the Central Bank was concerned about the weakness of the lira and a high rate of inflation. By December 2020 the base interest rate had increased to 17%. However, some economists argued that the Central Bank would need to raise the base interest rate further to support the weak currency.
Turkey’s long-term economic growth will depend on attracting foreign direct investment and establishing a stronger partnership with the European Union (EU) which is a customs union and common market. Turkey is an important partner for the EU on matters related to trade, investment and migration. Governments of many EU countries believe that they have an economic interest in developing a mutually beneficial relationship with Turkey.
With reference to Figure 3 and Extract A, analyse two factors, other than changes in interest rates, that may have led to a depreciation of the Turkish lira.
The exchange rate of the United Arab Emirates (UAE) currency, the dirham, is fixed against the US dollar. Assume that the UAE Government instructed the country's central bank to reduce the exchange rate of the dirham against the dollar.
Which one of the following would best describe the impact of this policy?
The exchange rate would appreciate
The exchange rate would be devalued
The exchange rate would depreciate
The exchange rate would be revalued
Sources for use with Section B
The economy of Pakistan
Figure 1 National debt, $ billions, 2018–2022
Figure 2 Rupee–US dollar exchange rate, January 2022 to June 2022
Extract A Economic outlook Between January and June 2022 Pakistan’s currency, the rupee, depreciated against the US dollar. This was mainly as a result of rising global inflation rates and the strong appreciation of the US dollar. However, economists expected the external value of the rupee to increase against the US dollar in the third quarter of 2022. They anticipated 5 that the dollars earned by Pakistan from its exports would be greater than the dollars paid for its imports and debt servicing. Pakistan experienced a significant decline in foreign currency reserves from $16 billion in June 2021 to $10 billion in June 2022. Many economists believed that the economy could be on the verge of an economic collapse in the third quarter of 10 2022. In June 2022, Pakistan’s central bank, the State Bank of Pakistan (SBP), informed Pakistan’s Government that the country’s rising foreign currency gap would have a negative impact on its ability to import. The SBP claimed that the rising foreign currency gap was likely to increase further because of higher debt servicing 15 payments. To prevent these reserves from running out, the SBP suggested a temporary ban on the import of non‑essential goods. Pakistan’s Government borrowed $1.2 billion from the IMF to prevent a further fall in foreign currency reserves. This financial support enabled the Government to reduce its current account deficit of the balance of payments and to help finance the 20 country’s national debt. The loan from the IMF required the Government of Pakistan to meet certain conditions. These included a reduction in the fiscal deficit, partly by the removal of fuel and energy subsidies. The IMF also required Pakistan’s central bank to raise its base rate of interest to stabilise the rupee. 25 Previous governments of Pakistan have not always met the terms of their loan agreements with the IMF. For example, the fiscal deficit has not been reduced significantly because the government collects very little revenue from direct taxes, especially from the booming property market. Large houses cost anywhere between $500 000 and $2 million to purchase but the owners only pay a small proportion as 30 tax. The IMF proposed that high‑income households should pay significantly more income tax than low‑income and middle‑income households.
With reference to Figure 2 and the first paragraph of Extract A, examine two likely effects of the depreciation of the rupee against the US dollar.
Which one of the following combinations is the most likely impact of an increase in labour productivity?
Unit labour costs
Export prices
Fall
Fall
Fall
Rise
Rise
Fall
Rise
Rise
In 2021 the UK experienced a fall in labour productivity. It remained below the average labour productivity of its main trading partners.
Ceteris paribus, which one of the following can be deduced from this statement?
UK goods and services were less internationally competitive than those of its trading partners
Average export prices of UK goods and services were lower than the average export prices of its trading partners
Unit labour costs in the UK were the same as the average unit labour costs of its trading partners
The UK experienced a significant deterioration in its terms of trade
According to the Global Competitiveness Index, Belgium’s international competitiveness rank fell four places between 2015 and 2019.
Evaluate measures that a developed country might take to increase its international competitiveness. Refer to a developed country of your choice in your answer.