Paper-2

The Government and the Economy (macroeconomics)

Book chapter (25 to 34)

Macroeconomics Objective(Follow Book Chapter-25)

(1) To increase economic growth
(2) To reduce unemployment
(3) To control inflation
(4) To reduce balance of payment deficit (export increase
but import decrease)
(5) To protect environment
(6) Redistribution of income (reduce inequality)

Economic growth (Follow Book Chapter-25)

Gross Domestic Product (GDP)
The total value of all the goods and services produced with in a country over the period
of time.
Year GDP
2019 500
Economic growth

The increase in real Gross Domestic product over the period of time.

Year GDP
2013 500
2014 550/450

Economic growth rate

The % increase in real Gross Domestic product over the period of time.

Economic growth rate =Change in GDP x100

GDP
= 550-500 x100
500
= 10% (positive) Economic growth increase
Or = -10% (negative) Recession/ Economic growth fall
?
Answer
When the economic growth rate is negative that means falling GDP.
Reference
July 2012 to July 2013 GDP /economic growth rate -0.5.-0.8,-0.3,-0.1
But recession fall
Economic growth rate can be
1 Positive GDP increase
2 Negative GDP decrease
Positive GDP rate can be
1 lower rate (10% to 5%)
2 Higher rate (5% to 12%)
3 constant rate(5% to 5%)

Factors /causes / ways/ Government policy to increase economic

growth
(1) government expenditure increase -Demand increase
(2) Rate of interest decrease - Demand increase
(3) Education and trading development – Supply increase
(4) Introduce new technology – supply increase
(5) Investment increase -supply and demand increase
6 tax decrease- demand increase
7Subsidy to domestic firm- supply increase
8 land improve – supply crease

Effect of economic growth

Advantages /benefits Disadvantages/costs

(1) standard of living increase (1) environment damage (pollution increase)
(2) unemployment decrease (2) inflation(price rise)
(3) Govt tax revenue increase (3) non-renewable resources run out
(4) Better public/social service (4) import increase(more use foreign goods)
(5) Per head income increase

Per head/Per capita income =Total GDP/ Total population

 The economic cycle
(Boom, downturn, recession, recover)
?
Boom
During a boom, GDP is growing fast because the economy is performing well.
Features
1 New firms will be entering the market
2 Demand will be rising
3 Jobs will be created
4 Salary will be rising
5 Price increase
Downturn
The economy is still growing but at a slower rate
Features
Demand will stop increasing
Unemployment will start to rise
Many firms will stop expanding
Some firms will leave the market
Profit will fall Price will fall
Recession
At the bottom of the economic cycle, where the GDP starts to fall.
Reference -1%
Features
Demand will start to fall
Unemployment will rise
Business confidence is very low
Price will fall
Recovery
When GDP starts to rise again
Features
Demand starts to rise
Unemployment starts to fall
Price will start to rise

Boom Where GDP is growing at its fastest

Downturn Where GDP grows but more slowly

Recover Where GDP starts to rise again.

Recession Where GDP starts to fall / GDP rate negative

 Unemployment (Follow Book Chapter-27)

Involuntary unemployment
The people (workforce) who are willing to work at the market wage rate but do not
get job.
Voluntary unemployment
The people who are not willing to work at the market wage
rate but at higher wage rate they will take the job.
Causes /factors
(1) High unemployment benefit (2) higher income tax.

Types of unemployment (Involuntary)

(1) cyclical / demand deficient unemployment
When the unemployment arises to fall in demand.
Causes /factors
Recession in a country,
Recession in Global economy.
(2) structural unemployment
Unemployment caused when by changes in the structure of the economy such as the
decline in an industry.
Factors /causes –decline demand, technological progress, substitute goods, foreign
competition, sector change.
(3) frictional Unemployment
When workers are unemployed for a short period of time as they move from one job to
another job.
(4) seasonal unemployment
Unemployment caused when seasonal workers such as those in holidays industry are
laid off because the season has ended. e.g. –tourist guide, agriculture worker.

Costs /Disadvantages of unemployment

(1) standard of living fall(2)Government tax revenue fall
(2) Government expenditure increase (4) demand fall (5) social crime increase
Factors /causes / ways/ Government policy to reduce unemployment

1 government expenditure increase -Demand increase

(2) Rate of interest decrease - Demand increase
(3) Education and trading development – Supply increase
(4) Investment increase -supply and demand increase
5 tax decrease- demand increase
6Subsidy to domestic firm- supply increase
(7) Increase small firm
(8)Mobility of labour increase
(9)Job Information center
(10)set up retraining cente
Protection of the environment (Follow Book Chapter-29)
Method of protection
(1)Taxation (2) Subsidy to recycling industry
(1) Government regulation (4) Pollution permits (5) Road pricing and charges
(6)International targets (7) fine (8) government provision of parks (9) Ban- plastic
bags, smoking on public place(Tobacco), Old car,
 Inflation(Follow Book Chapter-26)
Inflation
Persistent rise in general price level
Deflation
Deflation is the term used to describe a fall in average price level.
Rate of inflation
The % increase in general price level over the period of time.
Year RPI/CIP/Price Level
2013 100
2014 110/90
Rate of inflation= 110-100 x100
100
= 10% (positive) inflation (price level increase)
Or = - 10% (negative) deflation (price level decrease)
?
Rate of inflation can be 1 positive
2Negative
Positive rate can be
1 lower rate (10% to 5%)
2 Higher rates (5% to 12%)
3 Constant rates (5% to5%)

Retail price index (RPI)/Consumer price index (CPI)

It measures rate of inflation /cost of living.

(1) Demand pull inflation (2) cost push inflation

Inflation caused by too much demand Inflation caused by rising business costs.
in the economy relative to supply When business are faced with rising costs by
(Demand >Supply) increasing price of raw material, labour, rent
they put up their prices to protect their profit.

Causes Causes
Rising consumer spending, Wage increase,
Taxation decrease, Oil price increase,
Government spending increase, Raw materials price increase.
Rate of interest decrease
Consequences of inflation or effect of inflation (Follow Book Chapter-33)
Price 100 to 200

(1) Wage increase-

(2) menu costs (3) shoe leather costs
(4)fixed income group - loser
(1) money lender-loser, money borrower-gainer
(2) saver-loser
(7) Four function of money -money value decrease
(8) Employment
If demand pull inflation -unemployment decrease
If cost push inflation -unemployment increase
(9)Balance of Payment - export decrease
Import increase
So Balance of payment deficit
(10)Uncertainty (11) business and consumer confidence (12) Investment (13)
price

Money
Four function of money
(1) A medium of exchange
(2) A store of value
(3) A measure of value
(4) A standard for deferred payments
Government policy to control inflation/reduce price level (110 to 100)
1Supply increase (Supply side policy)
(a)Subsidy to firms
(b) Deregulation
(c) labour productivity increase
(d) introduce new technology
(e) discover new resources
(f) Education and training development
(d) set up job information

2Demand decrease (Demand side policy)

(a)Taxation increase (Direct tax and indirect tax)
(b)Government expenditure decrease
(c)Rate interest increase
 Balance of payment (Bop) (Follow Book Chapter-28)
A record of all transactions relating to international trade.

International trade
When the goods are exchanged between two countries.

Balance of payment = export - import

Export – sell to foreign country/money inflow
Import –buy from foreign country/money outflow

Balance of payment

Deficit surplus
Export <Import Export >Import
BOP = Export-import BOP = export- import
= 3000 - 3500 = 3500 - 3200
= - 500 = 300

Export
Goods and services sold foreign market

Visible export -BD garments sold to USA

Invisible export -USA people spending holidays in BD

Import
Goods and services bought from foreign market
Visible import
BD car bought form USA
Invisible import - BD people spending holidays in USA

Visible -goods
Invisible –service
Terms of BOP
(A) Balance of trade
Or Balance of visible trade=visible export - visible import
=3000 - 3500
= -500(deficit)
(B) Balance of invisible trade = invisible export-invisible import
=3000-2800
=200(surplus)
A+B
Balance of current account = visible trade +invisible trade
= -500+200
= -300 (deficit)
Or

Balance of current account =( visible export +invisible export) –(visible import+

invisible import)
=(3000+3000)-(3500+2800)
=6000-6300=-300

Question
1Visible trade=visible export - visible import
2Visible trade deficit
When the visible export is less than visible import
3Visible trade surplus
When the visible export is greater than visible import
4Invisible trade=Invisible export - Invisible import
5InVisible trade deficit
When the invisible export is less than invisible import
6InVisible trade surplus
When the invisible export is greater than invisible import

Relationship between current account and exchange rate?

Currency appreciation (TK)

$1= 80TK
$1=70TK

So current account deficit

Currency depreciation (TK)

$1= 80TK
$1=90TK
So current account surplus

Reasons for deficit

(1)Quality of domestic goods bad
(2) Price of domestic goods high
(3) Quality of foreign goods better
(4) Price of foreign goods lower
(5) exchange rates between countries appreciation

Reasons for surpluses

(1)Quality of domestic goods better
(2) Price of domestic goods lower
(3) Quality of foreign goods bad
(4) Price of foreign goods higher
(5) exchange rates between countries depreciation

Effects of a current deficit

(1)A rise in unemployment
(2)An increase in international debt
(3)It may reflect structural weaknesses
(4)Downward pressure on the exchange rate (currency depreciation)
?

From 2013 to 2014

Balance of payment deficit increase from $5bn to $10bn.So BOP worsen.
From 2014 to 2015
Balance of payment deficit decrease from $10bn to $3bn. So BOP improved.
Govt policy to reduce BOP deficit(Export increase but import fall)
1For export increase

1Supply increase (Supply side policy)

(a)Subsidy to firms
(b) Deregulation
(c) labour productivity increase
(d) introduce new technology
(e) discover new resources
(f) Education and training development
(d) set up job information

2Demand decrease (Demand side policy)

(a)Taxation increase (Direct tax and indirect tax)
(b)Government expenditure decrease
(c)Rate interest increase

Overall inflation control (price fall) so export increase

2For import decrease

(a) Tariff (b) Quota(c)subsidy to domestic (d) domestic goods better quality
 Macroeconomics Objective(Follow Book Chapter-25)
(1) To increase economic growth
(2) To reduce unemployment
(3) To control inflation
(4) To reduce balance of payment deficit
(5) To protect environment
(6) Redistribution of income

Government Policy
(To gain macroeconomics Objectives
(1) To increase economic growth –Demand &supply increase
(2) To reduce unemployment- Demand &supply increase
(6) Redistribution of income- Demand &supply increase

(3) To control inflation- Demand decrease but supply increase

(4) To reduce balance of payment deficit- Demand decrease but supply increase
(5)To protect environment-Demand decrease &supply decrease

x(6) Redistribution of income- Demand &supply increase

1 Demand side policy (demand increase or decrease)
(a) Fiscal Policy

*Taxation
*Government Expenditure

(b) Monetary policy

* Rate of interest
*Money supply
2 Supply side policy (supply increase or decrease)

(1) Education and training development

(2)Increase small firm
(3) Privatization
(4) Deregulation
(5)Increase mobility of labour
(1)Government objective
(1) To increase economic growth - Demand &supply increase
(2) To reduce unemployment- Demand &supply increase
Government policy(Demand side policy)
Fiscal policy Monetary Policy
Taxation decrease Rate of interest decrease
Government expenditure increase

So demand increase
(2)Government objective
(1) To control inflation (decrease price level)- Demand decrease but supply increase
(2) To reduce balance of payment deficit (increase export and decrease import)- Demand
decrease but supply increase
(3) To protect environment- Demand decrease &supply decrease
Government policy( Demand side policy)
Fiscal policy Monetary Policy
Taxation increase Rate of interest increase
Government expenditure decrease

So demand decrease.

(3)Government objective
(1) To increase economic growth- Demand &supply increase
(2) To reduce unemployment- Demand &supply increase
(3) To control inflation- Demand decrease but supply increase
(4) To reduce balance of payment deficit- Demand decrease but supply increase
Supply side policy
Education and training development
Increase small firm
Privatization
Deregulation
Set up job information center
Set up retraining center
Infrastructure spending
Lower business taxes
Lower income tax rates to encourage working

So supply increase
Relationship between Macroeconomics objectives and Macro Policies
(Follow Book Chapter-34)
Conflict between objectives

(1)Expansionary policy (demand increase)

Expansionary fiscal policy that means:
Taxation fall
Government expenditure increase

Expansionary monetary policy that means

Rate of interest decrease
Money supply increase
Effect of expansionary policy
Advantages/ Positive
Economic growth increase
Unemployment decrease

Disadvantages/Negative
Inflation
Balance of payment deficit
Environment damage (pollution)
 (2)Contractionary policy(demand decrease)
Contractionary Fiscal policy that means
Taxation increase
Government Expenditure decrease

Contractioary Monetary policy that means

Rate of interest increase
Money supply decrease
So demand decrease
Effect of Contractionary policy
Advantages/positive
Control inflation
Reduce balance of payment deficit
Protect environment
Disadvantages/Negative
Economic growth fall
Unemployment increase
 Taxation (Follow Book Chapter-31)
1 Direct Taxation
The tax which impose on income, wealth and profit.
(a) Income tax is a direct tax on the amount earned by an individual.
(b) Corporation tax is levied on the profits made by limited companies. Others types of
business such as partnerships and sole traders pay income tax.
(c) Capital gains tax is levied on any financial gains made.
(d) Inheritance tax is paid on money that is inherited from people that die.
(e) National insurance contributions

2 Indirect Tax
The tax which impose on goods and services/ Spending.
(a)Value added tax (VAT)
(b)Duties
(c)Vehicle excise duty
(d)Customs duties
(e)Council tax
(f)Business rates
(g)Stamp duties
Progressive
When the tax rates increases with the increase in income.
Income Tax % Total Tax
10000 10% 1000
20000 15% 3000
30000 20% 6000

Regressive
When the tax rates decreases with the increase in income.
Income Tax % Total Tax
10000 10% 1000
20000 8% 1600
30000 6% 1800

Proportional
When the tax rates remain the same at level of the income.
Income Tax % Total Tax
10000 10% 1000
20000 10% 2000
30000 10% 3000
 Budget (Follow Book Chapter-31)
The government’s spending and revenue plans for the next year.
Budget = Government Revenue - Government Expenditure
= 3000 - 5000
= -2000 (Deficit)

Budget Deficit
When the government expenditure is greater than the government revenue
Budget Surplus
When the government expenditure is less than the government revenue

From 2013 to 2014 budget deficit increase 5b to 10b. So worsen.

From 2014 to 2015 budget decreases 10b to 3b. So improved.

Source of Government Revenue/Income

(1)Taxation
Direct tax, Indirect tax
(2)Non Taxation
Fine, Privatization (Government ownership firm sell to individual ownership),
Registration fee

Source of Government of government Spending

(1)Infrastructure development (Road, Power supply, Water supply, Communication)
(2)Health care and education (3) Social welfare benefit (child benefit, old age pension,
unemployment benefit) (4) subsidy to firm (5) defense
(11)Limitation of GDP as a measure of growth (Follow Book Chapter-25)
(1)Inflation (price level increase)
(2) Population change
(3) Statically errors
(4) The value of home produced goods
(5) The hidden economy
(6) GDP and living standards
(7) Negative externalities (pollution/ environment damage)

(12)Function of Money (Follow Book Chapter-)

(1)A Medium of exchange

The main function of money is that it acts as a medium of exchange. This means that
money can be exchanged for goods and services when buyers and sellers trade.
(2)A store of value
This means that money can be stored for a period of time and used a later date. For
example money received today can be used in ten years time to make a purchase.
This encourages people to save.
(3)A Measure of value
Money is used to measure the value of goods and services. This means that
comparisons can be made between the different values of goods and services.
(4)Standard for deferred payments
This means that money can be used to settle a debt. Payment for some goods is
deferred. This means that goods are bought and then paid for at a later date. This is
because the seller is quite happy to accept money in the future as payment.
CW-
Redistribution of income (Follow Book Chapter-30)
Income inequality
Income inequality difference in income that exist between the different groups of earners
in society that is the gap between the rich and the poor

Absolute poverty
Absolute poverty where people do not have enough resources to meet all of their basic
human needs.

Relative poverty
Relative poverty poverty that is defined elative to existing living standard for the average
individual

Reasons for inequality

(1)Skills, valuable work experience and a good education (2) natural talent (3)
Unemployment (4) Own assets such as property, shares and capital will enjoy extra
income such as rent and interest.(5) Inheritance (6) less Competition

Reasons to reduce poverty and inequality

Meet basic needs
Raise living standard
Ethical reasons
Government intervention to reduce poverty and income inequality
(Govt policy)
Progressive taxation
Progressive
When the tax rates increases with the increase in income.
Income Tax % Total Tax
10000 10% 1000
20000 15% 3000
30000 20% 6000

That means rich people will pay more Tax

Redistribution through benefit payments

Example for Unemployment benefit, Child benefit, Old age pension

Investment in education and health care

Education development, Health care development
Global economy (35 to 42)

Globalization (Follow Book Chapter-35)

The growing integration (join together) and interdependence (one country depend on
another) of the world’s economies.

Deglobaization

Features /characteristics
(1) movement of goods and service across international borders
(2) movement of labour across international borders
(3) Free movement of capital(machinery) and technology.
(4) corona (70% to 60%)

Features /characteristics deglobazation

1 corona (1% to 70%)

(1) movement of goods and service across international borders fall

(2) movement of labour across international borders fall
(3) Free movement of capital(machinery) and technology. fall

Factors/ reasons
(1)Fewer Tariff and Quota ( Free trade )

(2) Reduced cost of transport (Transport development )

(3)Reducing communication costs (Technology development)

(4)Multinational company development (when a company produce more than one

country)

(5) Deregulation (reduce paper working)

Factors/ reasons delocalization
1 more Tariff and Quota

(2) Increase cost of transport

(3)increase communication costs

(4)Multinational company less development (when a company produces more than

one country)

5 regulation

Price in china Cost BD govt tax on china product (tariff) BD price

100 tk 20tk 20 140

Effect of Globalization
Advantages Disadvantages
(1) More choice (2) lower price better Quality (1) Negative effect on environment
(3) Unemployment decrease (4) less conflict (Global warming)
(5)Technology development (2) Weak firm drive out
(6)GDP increase (3) Non- renewable resource run out
(7) Lower cost (4) Interdependency

Costs to developing nations of globalization

Developing countries depend on primary sector
MNC often pay low wage
 Multinational company (MNC) (Follow Book Chapter-36)
A large and power full firm that sells goods and services into global markets and owns
production plants and other operating facilities all over the world.
Example- Toyota, Wal –Mart stores, Unilever, McDonld’s

When a company produces more than one country.

Foreign direct investment (FDI)

Business investment under taken by a firm in another
country, example building a factory.

FDI
(1) FDI inward(money inflow)

(2)FDI outward (Money outflow)

Factors/causes of MNC/FDI
(1) To minimize cost (cheap labour, cheap raw materials)
(2) To capture more market share (to avoids tariff )
(3) To get more profi

To encourage MNC /FDI government policy

Non-Financial incentive
(1) Infrastructure development
(2) Education and training develop (3) political stability
Financial incentive
(1) Lower tax, (2) subsidy (3) lower rate of interest
Effect of MNC /FDI set up in country
Advantages (knowledge)
(1) Unemployment decrease (2) more choice
(3) Lower price (4) better quality
(5) Tax revenue increase (6) Technology transfer
(7) Competition increase
Disadvantage
(1) Weak firm drive out (2) non renewable resources run out
(3) Pollution (4) import value increase (5) Lower payment (6) Lower tax payment

Effects of MNC leave the country

Advantages
(1) To protect weak firm
(2) Save resources (3) improve BOP
Disadvantage
(1) Unemployment increase
(2) Competition decrease
(3) Less choice (4) Government tax revenue fall

FDI inflow
(1) FDI inward increase-money inflow($3944m) increase –Demand for domestic
currency(TK)-Value of domestic currency increase- appreciation(TK)
Year
2019 $1=80Tk
2020 $1 =78Tk

FDI inward decrease-money inflow($3944m) decrease –Demand for domestic

currency(TK) decrease-Value of domestic currency decrease- depreciation(TK)
Year
2019 $1=80Tk
2020 $1 =82Tk

FDI outward (Money outflow)($3944m) -Supply of currency($) increase-Value of

domestic currency decrease- depreciation($)
Year
2019 $1=80Tk
2020 $1 =78Tk
 Why MNC exist?
Reasons/Factors
(1)Gain economies of scale
(2)Technical and financial superiority
(3)Marketing/Brand
 Protectionism (Follow Book Chapter-38)
An approached used by government to protect the domestic firm from foreign
competition
Method of protectionism
(1)Tariff (2) Quota (3) Subsidy (4) Currency depreciation (5) Administrative
barriers/regulation
Tariff/Tax on foreign goods
Tariff is financial restrictions on the imported goods. Due to impose tariff price of
imported goods will be relatively higher in the home market. So import will fall
Diagram
Quota/Limited
Quota is physical restrictions on the imported goods. Due to impose quota imported
goods will be limited. So import will fall.
Diagram

Subsidy
Subsidy is grant paid by the government to producers in order to increase the production.
Due to subsidy costs of production decrease. Exported goods will be relatively cheaper in
the world market and imported goods will be relatively higher in home market. So import
will fall and export will rise.
Diagram ?

Currency depreciation/Devaluation
1$ =80 Tk
1$ =90 Tk
So Tk is depreciated. Due to currency depreciation price of imported goods
will be expensive in home domestic market. So import will fall .But price of
exported goods will be relatively cheaper in foreign market. So export will
rise.
Administrative barriers/regualtion
Some countries avoid the use of tariffs and quotas but still manage to reduce the amount
of imports coming in. They do this by insisting that imported goods meet strict regulation
and specifications. For example, a shipment of toys from the Far East might be returned
if they fail to meet strict health and safety regulations. Goods that fail to reach cultural or
environmental standards may also face administrative barriers.

Reasons for protectionism/ advantages

(1)Protecting employment (2) Protecting infant industries (3) Preventing dumping
(4)Raising revenue (5) Preventing the entry of harmful goods (6) Improving the current
account balance
Dumping
When the product sell below the cots of production in foreign market.
Disadvantages
(1) Less choice(2)competition fall(3) loss free trade benefit(4)trade war
 International Trade
When the goods are exchanged between two countries

Trade means selling and buying

Types of trades (selling and buying)

(1) Local trade (selling and buying) – Local market

(2) National trade (selling and buying)- National market

(3) International trade (selling and buying)-International market

Reasons for International trade (selling (export) and buying (import)) with each other

Reasons for buying (Import)-No production in domestic , Higher price in Domestic

country, Lower quality in domestic country

Reasons for Selling (export)

(1) Excess supply

Reasons for International trade (selling (export) and buying (import)) with each other

(1) Obtaining goods that cannot be produced domestically /No domestic production
(2) Improving consumer choice/ better quality /Lower price
(3) Sell to excess supply
(4) Obtaining goods that can be bought more cheaply from foreign market/ Foreign
goods cheaper compare to domestic goods
Types of international trade
(1)Free trade (2) No free trade/Trade barriers

Effect of free Trade

Advantages
(1) More choice
(2) lower price
(3) Better Quality
(4) Competition increase
(5) Lower input cost
(6) Wider markets for business

Disadvantages
(1) Foreign competition harming domestic business (Weak firm drive out)
(2) Increase unemployment
 Trading Bloc (Follow Book Chapter-39)

When a group of countries Join together and abolish trade barriers between members of
countries and impose common external tariff on non member of countries.

Example-EU- 27 COUNTRY , ASEAN – 10 COUNTRY

Features /characteristic
(1)Free trade between members of countries
(2) Common external tariff on non-member of countries.

Effect of trading Bloc

Advantages
(1) Competition increase (2) More choice (3) lower price and better quality
(4) Share resource (5) economics of scale(6)Large market

(Population increase, land increase, GDP INCRESAE, Trade increase, Life ex increase)

Disadvantages
(1) Weak firm drive out (2) Higher price charge (3) Trade decreases with non member of
countries
 Exchange rate(Follow Book Chapter-41)
The price / value of one currency in terms of another currency.
Example- $1=80Tk
How are exchange rates determined?
Market exchange rate
When the price of a currency is determined by demand and supply of currency
Price of TK in $ S of TK

$l= 80TK

D for TK
O Q Q for TK
Currency appreciation Currency Depreciation
Or revaluation Or Devaluation
When the value of one currency When the value of one currency decrease
increase against the foreign currency against the foreign currency.
Example Example
$1=80Tk $1=80Tk
$1=70Tk $1=90Tk
Depreciation Appreciation Appreciation Depreciation
Or or or or
Devaluation revaluation revaluation Devaluation
? ?
Factors affecting the demand for a currency
(1) The demand for Exports increase- money inflow increase- Demand for currency
increase- appreciation
(2) Inward Foreign Direct Investment (FDI) increase - money inflow increase-
Demand for currency increase- appreciation

(3) Rate of interest in country increase –Foreign saver encourage to save in country-
money inflow increase- Demand for currency increase- appreciation

(4) Speculative expected higher price- Demand for currency increase- appreciation

Factors affecting the supply of a currency

(1) The demand for Imports increase –money outflow- supply of currency increase-
depreciation
(2) Outward Foreign Direct Investment (FDI) increase - money outflow- supply of
currency increase- depreciation

(3) Rate of interest in other country increase – Domestic saver will encourage to save
in foreign country - money outflow- supply of currency increase- depreciation
Effect of exchange rate (Follow Book Chapter-42)
Impact of falling/ depreciation exchange rate
Impact of falling exchange rate on balance of payment on current account
Change in the exchange rate can have an impact on the demand for exports and imports.
This is because when the exchange rate changes the prices of exports and imports also
change.
1$=80Tk
1$=90Tk
Appreciation Depreciation
So effect of currency depreciation
Export increase
Due to currency depreciation/falling price of exported goods will be
relatively cheaper/lower in the foreign market .So demand for export will rise.

Import decrease
On the other hand price of imported goods will be relatively higher in
home market. So demand for import will fall.
Therefore Balance of payment on current account would be improved.
Evaluation……..??

Impact of rising /appreciation exchange rate on balance of payment on

current account

1$=80Tk
1$=70TK
Appreciation Depreciation
So effect of appreciation
Export decrease
Import increase
Therefore balance of payment on current account would be deficit.
Evaluation……..??

Exchange rates and government policy

Over a period of time a country must pay its way when trading with others. A
government should therefore aim to balance the current account. But what can the
government do, if for example, there is a large and persistent current account deficit? One
approach is devaluation. This is where the value of a currency is allowed to fall
depreciate. If the exchange rate falls the price of exports is falls and the price of imports
rises.
 Developed and Developing country

Characteristics of Developing countries

(1)Lower per head income
(2)Low life expectancy
(3)Low literacy
(4)High population growth
(5)Poor infrastructure
(6)Poor health
(7)Low labour productivity
(8)Primary sector decrease, Secondary sector increase and Tertiary sector increase
Development aid
Money and other forms of assistance that is given to less developed countries by
governments in developed countries.

Grants
This is where a government gives a less developed country a cash sum. The money might
be for a specific purpose such as an irrigation project or the building of new school. It
might also be free technical advice or free education.
Loans
A lot of aid is in the form of low interest rate or interest rate free loans. The money given
is expected to be repaid at some point.

Increase in world Trade

Factors/Reasons
(1) Better transport and communications
(2) Relaxing of trade barriers
(3) Development of Multinational company
(4) Travel and consumer awareness
(5) Trade agreements