Current account continuation

1) Distinguish between a market failure and a government failure

Market failure is when the market fails to allocate resources efficiently.

Government failure is when government intervention leads to worser outcome.

2( Price elasticity is the responsiveness of quantity supplied given a change price can be supplied in comparison to price change. A good might have an inelastic PES if its a necessity.

3)An increase in price of inelastic good may not have a big change in demand and revenue will stay similar.

An increase in price leads to a small %fall in QD. Therefore, the total revenue (price x quantity) will increase.

4)State the impact on both the domestic and foreign price of UK exports following a fall in the value of sterling from £=RMB 13 TO £RMB 8.

When exchange rates and foreign price goes down the price of exports go down so when the UK exchange rates fell the price of UK exports, in terms of RMB, also fell. To buy a £10 export, China used to have to pay rnb130 but now only pay RBN 80.

Exchange rates and the domestic price of Q x import’s move in opposite directions to buy a RMB 208 good from China used to cost UK £16 but now is £26.

CAUSES OF CURRENT ACCOUNT DEFECIT WHY IS X-M NEGATIVE?

A )overvalued exchanged rate-

b)Low levels of past investment in capital and research and development

If a country hasn’t invested enough in:

• modern machinery

• technology

• research & development then its firms become less productive and less competitive internationally.

C)Economic boom/economic upswing (A rapid rise in disposable income).

The UK has a high marginal propensity to import. Out of any extra income, a large proportion is spent on imported goods. Therefore, higher incomes will lead to more imports (M) and a fall in the current account (X-M).

D) If there is recession in countries such as the USA or Germany, then they would not be buying so many UK exports. A fall in X would lead to a fall in current account.

E).Brexit,