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Mock Paper 1 Q2(i)

R

rlsrachaellouisesmith

Ton up Member
Good morning,
In the mark scheme it states that overseas investment may decrease because of a weakening domestic currency.
However, it can be justified that if an overseas investor can get more domestic currency relative to their overseas currency this may increase overseas investment. In fact in paper 1 April 2014 it was argued that this was the case and may result in more foreign takeovers.
So, can you explain why overseas investment might decrease? Would it just be because of uncertainty in the economy?
Thank you
 
Hi - the situation in this question is that the domestic currency 'has started to weaken' and we are being asked about the potential issues 'from a weakening currency'. So the implication is that the currency will continue to weaken. If foreign investors purchase assets that are denominated in the domestic currency, then as that currency continues to weaken the value of those assets will continue to fall (relative to their own currency) and this would not give them a good return.

In April 2014, the question is asking about the impact on an economy 'from a reduction in its exchange rate relative to other currencies'. So this is asking about what might happen when the domestic currency has just depreciated in value. In this scenario, there is no suggestion that it will continue to depreciate. Hence it is appropriate here to consider the attraction of cheaper investments for foreign investors.

Hope that helps to explain the distinction between those questions.
 
Hi,

On part (ii) of this question, it states that:
  • exports are becoming less competitive, so volumes of exports is likely to fall (and the opposite happening for imports)...
  • ... which is likely to worsen the current account of the balance of payments (i.e. increase the deficit or reduce the surplus)
I'm not sure what is meant by the second bullet point, would someone be able to explain please?

Thanks in advance
 
'Balance of payments' = payments into country minus payments out of country
Fewer exports -> fewer payments coming into country
More imports -> more payments going out of country
So balance of payments becomes more negative (or less positive)
 
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