Answers To Economic Questions: Advantages Of UK, Efficacy Of Import Substitution And Export-led Growth Policies, EUR’s Strength And Weakness, MNCs, J-Curve Theory, Financial Crises, FDI, Central Bank’s Role, Exchange Rates, Keynesian Economics, Corporate Bond Yields, Heckscher-Ohlin Model, Balance Of Trade And Payments, Big Mac Index, And Terms Of Trade

Answer 1

a. There are several advantages for UK: the ability to shape a better environment, the freedom to regulate inagile, control of our own money, the liberty to govern in a more flexible manner control of waters, borders, and democracy (Minenna 2021).

a. Import substitution aims to build domestic markets to manufacture good which the nation has been importing, while export-led growth aims to build domestic markets which could contend in particular areas globally (Irwin 2021).  

b. Export-led growth policies

a. Strong EUR

Weak EUR

b. Generally, Importers and exporters are the ones who can take advantage of this. If EUR is weak, it would make exports cheaper and vice versa

a. The characteristics of a MNE involves it own subsidiary in other nations and it might run in other nation (Pitelis and Teece 2018).

b. MNCs can fill the gap among the need for foreign capital and the desire to increase foreign investment. Thus, the answer is yes (Luo and Tung 2018).

a. The J-curve theory is a short-term alternative to the G&S model’s basic premise that devaluation leads to a drop in the trade deficit. According to the J-curve effect, following currency devaluation, the current account balance would first drop for a period of time eventually rising as planned (Nusair 2017). If a nation does have a trade deficit from the outset, the imbalance will rise at first, and then fall as the currency devalues.

b. Competitive devaluation has an impact on the economy. Traditional partners of nation and international trade policy are both harmed by devaluation (Talani 2017). Devaluation policies like this are frequently used to combat domestic economic slump and rising unemployment.

Financial crises allude to major disturbance in financial markets specified by sharp drop in prices of asset and organization collapse (Jacoby and Hopkin 2020). Financial crises in developed nations have typically gone through three stages: Initiation of Financial Crisis, Banking Crisis, and Debt Deflation.

Inflows of FDI are recorded as a credit in BOP’s financial account, resulting in a direct beneficial impact on the company (Contractor et al. 2020). However, as FDI grows, the size of imports as well as profit repatriation grows as well.

By selling and buying government assets on the open market, central banks can alter the amount of money in circulation (Herger 2019). A central bank purchases government securities from institutions and commercial banks to improve the circulation of money.

Exchanging one currency for another at a local bank is a simple kind of foreign exchange. Further it is possible that currency trading on the foreign exchange market is involved.

Importance of Exchange Rates: one of the importances is that it changes inflation rates. A greater inflation rate in home nation would reduce the demand for home currency (Denzel 2017)

The demand for money, according to Keynes, is the urge to hoard money rather than invest in an income-producing asset such as a bond (Eldemerdash and Ahmed 2019). Net exports government purchases, investment, and consumption are the elements that make up an economy’s output.

Answer 2

a. Economic factors such as economic growth, the yield curve, inflation, and interest rates influence corporate bond yields.

b. Investors can use the curve’s shape to predict future interest rate changes. Long-term investments with a regular upward sloping curve produce a higher yield than short-term assets with a regular upward sloping slope.

c. The dangers of investing in T-bonds include opportunity risks, which include inflation, interest rate risk, and cost of capital (Shelley, Traian and Trainor 2020).

a. The Heckscher-Ohlin model is an economic theory that declares nations must export what they could produce most abundantly and economically (Ito, Rotunno and Vézina 2017).

b. TheUS exported labour-intensive goods; the Leontief paradox cast doubt on the factor-endowment theory’s applicability (Kiyota 2021). While the factor endowment theory was applied to the US, the outcome was opposite of what one would anticipate.

c. The Stolper–Samuelson theorem describe the link among relative factor rewards and relative output prices, specifically real wages and real capital returns (Jones  2018).

a. 

a. Balance of Trade:It is the difference among the monetary value of nation’s export and import at a specific period (Dogru, Isik and Sirakaya-Turk 2019).

Balance of Payments: It is the difference between outflow and inflow of foreign exchange.

b. Currency depreciation impacts a trade balance through its affect on purchasing power, spending behaviour, and relative prices (Bruno and Shin 2020).

c. Prior Depreciation

Total Price of Export = 3000000 (1000*3000)

Total Price of Import = 1500000 (150*10000)

Balance Of Trade = Value of Export – Value Of Imports

= 1500000

After Depreciation

Total Price of Export = 3000000 (1000*3000)

Total Price of Import = 3000000 (10000*2*150)

a. 

b. The Big Mac Index is a poll conducted by The Economist which looks at the relative undervaluation or overvaluation of currencies throughout the globe on the basis of the Big Mac’s price (Clements and Si 2017).

The purchasing power parity (PPP) states that currencies will rise or fall in value in order to maintain their purchasing power across countries.

c. The terms of trade under which equally valuable commerce could take place are determined by opportunity costs and comparative advantage. The conditions of commerce refer to the price at which two agents agree to trade, which, if favourable, allows both countries to benefit from trade.

a. A currency arbitrage is a currency approach where a currency dealer makes trades to take benefit of the various spreads given by brokers for a certain currency pair. There are two types: Covered interest, Triangular, Locational, and spot-future arbitrage (Gong and Yang 2020).

b. Implied cost rates are £1 = ¥ 166.720 (106.090 * 1.5715). Therefore £is overpriced is to ¥ in the actual market, and sterline should be selled for ¥.

Therefore, Step 1:  Using £ for ¥: The bid rate of ¥ 176.720. It would give ¥ 176720000 (176.720 * 1,000,000)

Step 2: Using ¥ for $: This would give ¥ 1665755.49 (176720000 / 106.0290)

Step 3: Using $ for £:  This would give $2776337.7 (15710.3763 * 176.720)

Answer 3

By using the gap in the price quotations of the three currencies, the initial amount turned into $2776337.7 with a profit of 1776337.7

c. When the function of speculators modifies price fluctuations and the size of price shift is limited, this is known as stabilising speculation. When the price of a commodity falls initially, more businesses sell it, and demand falls even more. Price swings are amplified with destabilising speculation (Krause 2019).

References 

Avdjiev, S., Bruno, V., Koch, C. and Shin, H.S., 2019. The dollar exchange rate as a global risk factor: evidence from investment. IMF Economic Review, 67(1), pp.151-173.

Bruno, V. and Shin, H.S., 2020. Currency depreciation and emerging market corporate distress. Management Science, 66(5), pp.1935-1961.

Clements, K.W. and Si, J., 2017. Simplifying The Big Mac Index. Journal of International Financial Management & Accounting, 28(1), pp.86-99.

Contractor, F.J., Dangol, R., Nuruzzaman, N. and Raghunath, S., 2020. How do country regulations and business environment impact foreign direct investment (FDI) inflows?. International Business Review, 29(2), p.101640.

Denzel, M.A., 2017. Handbook of world exchange rates, 1590–1914. Routledge.

Dogru, T., Isik, C. and Sirakaya-Turk, E., 2019. The balance of trade and exchange rates: Theory and contemporary evidence from tourism. Tourism Management, 74, pp.12-23.

Eldemerdash, H. and Ahmed, K.I.S., 2019. Wagner’s law vs. Keynesian hypothesis: New Evidence from Egypt. International Journal of Arts and Commerce, 8(3), pp.1-18.

Gong, Q. and Yang, Z., 2020. Arbitrage, speculation and futures price fluctuations with boundedly rational and heterogeneous agents. Journal of Economic Interaction and Coordination, 15(4), pp.763-791.

Herger, N., 2019. Understanding central banks. Springer.

Irwin, D.A., 2021. The rise and fall of import substitution. World Development, 139, p.105306.

Ito, T., Rotunno, L. and Vézina, P.L., 2017. Heckscher–Ohlin: Evidence from virtual trade in value added. Review of International Economics, 25(3), pp.427-446.

Jacoby, W. and Hopkin, J., 2020. From lever to club? Conditionality in the European Union during the financial crisis. Journal of European Public Policy, 27(8), pp.1157-1177.

Jones, R.W., 2018. The Golden Anniversary: Stolper–Samuelson at 50. In International Trade Theory and Competitive Models: Features, Values, and Criticisms (pp. 85-91).

Kiyota, K., 2021. The Leontief Paradox Redux. Review of International Economics, 29(2), pp.296-313.

Krause, L., 2019. Speculation and the Dollar: The Political Economy of Exchange Rates. Routledge.

Luo, Y. and Tung, R.L., 2018. A general theory of springboard MNEs. Journal of International Business Studies, 49(2), pp.129-152.

Minenna, M., 2021. A Look at EU-UK Trade Relations in Light of Brexit, Pandemic and the Trade and Cooperation Agreement. Pandemic and the Trade and Cooperation Agreement (April 9, 2021).

Nusair, S.A., 2017. The J-Curve phenomenon in European transition economies: A nonlinear ARDL approach. International Review of Applied Economics, 31(1), pp.1-27.

Pitelis, C.N. and Teece, D.J., 2018. The new MNE:‘Orchestration’theory as envelope of ‘Internalisation’theory. Management International Review, 58(4), pp.523-539.

Shelley, G.L., Traian, A. and Trainor, W.J., 2020. Stock market” prediction” models. Economics Bulletin, 20(2), pp.1548-1556.

Talani, L.S., 2017. The ECB and the Quest for Competitiveness of the Eurozone: From the Competitive Devaluation of the Euro to QE. Journal of Balkan and Near Eastern Studies, 19(4), pp.351-365.