Wednesday, June 22, 2011

Highly Possible Topics To Be Tested In Unit 4: Global Economy

Here is what you have been waiting for. Sorry, I really have limited time to blog tonight. Do send message to me through my chatbox. Hope to get back to you in no time.

A. National debt

1. Reasons for ballooning national debt/ increasing fiscal deficit/ deteriorating public finances:

a) Large scale government to bail out the failed financial institutions

b) Payment for jobseekers allowance rose

c) Falling tax revenue as many people were made redundant, companies reported large losses and fall in asset prices led to lower capital gain tax

d) Increasing number of elderly people. So there is a commitment to pay for Social Security and healthcare

e) More borrowing to pay for previous debts

2. Economic implications/ effects of rising level of national debt/ budget deficit:

a) Austerity programme to balance the book

b) Crowding out effect

c) Rising inflation

d) Lower credit rating by Fitch, Moody’s and S&P’s. More difficult to raise finances

e) Economic growth hence better ability to pay for the debt

f) More jobs created

3. Methods to reduce national debt:

a) Austerity drive to bring UK out of red ink

b) Expansionary fiscal and monetary policy to attain growth so that more tax revenue can be generated to pay off the debt

c) Expansionary fiscal and monetary policy to achieve higher inflation, so that UK’s debt worth lesser than what it looks

d) Negotiate for more favourable term but unlikely to happen

B. Eurozone crisis

1. Reasons to join:

a) No transaction costs. Only minimal fee paid to banks for facilitating the process

b) Eliminate exchange rate uncertainty. So predicting costs, profits and planning for future production are made easy

c) Macroeconomic discipline. Members are reminded to keep inflation low and not to overspend

d) May emerge as a large economic powerhouse succeeding the States and euro may overtake dollar as the most traded currency

e) Attract more FDI

f) Price transparency as firms and consumers can compare prices which are all quoted in euro

g) Financially secured as member countries are more backed by EU government that wants to secure the interests of entire euro zone e.g. EU government tries to prevent Greece from becoming insolvent

2. Reasons not to join:

a) No power to set own interest rate that is best to own nation

b) Cannot devalue currency to boost competitiveness and pursue export-led growth in times of crisis

c) Strict inflationary target which is close to but below 2% at the expense of lower economic growth

d) ight spending target as member countries are told not to succeed over Growth and Stability Pact

e) Confusion on day of transition

f) Loss of jobs especially bankers, currency analyst and workers in money exchanger

C. Falling pound

1. Reasons for collapse in pound:

a) Severe cut in interest rates and maintained at 0.5% for a very long time

b) Lack of demand for UK bonds

c) Speculation that sterling may fall. So currency speculators and foreign government choose to hold lesser pound

d) Current account deficit

e) De-globalisation which has caused reversal of FDI. So lesser demand for pound

2. Economic effects:

a) Value of foreign debts worth more

b) Narrow current account deficit

c) Revival of manufacturing sector. So more jobs created

d) Inflation due to rise in (X-M) and artificially more expensive foreign goods and raw materials

e) Economic growth

f) Further fall in pound due to speculation activities

g) Rise in FDI due to growing competitiveness

Also watch out for topics like protectionism/ foreign aid/ debt cancellation/ FDI together with its benefits and costs

Section B:

8 marks evaluation based question (2 explanations 6 marks and 1 evaluation 2 marks)

10 marks evaluation based question (2explanations 6 marks and 2 evaluations 4 marks)

12 marks evaluation based question (2 explanations 7 marks and 2 evaluations 5 marks)

15 marks evaluation based question (3 explanations 9 marks and 2/3 evaluations 6 marks

Also, bear in mind that a MAXIMUM mark per explanation is 4 marks. Will never be higher. So don’t try to change the formation

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