INTENSIVE DATA RESPONSE EDEXCEL

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1 RESPONSE EDEXCEL Economics Advanced Level Intensive Data Response Questions for THEME 4 QUESTION PAPER

2 Edexcel A Level Economics (A) Theme 4: Intensive Data Response What is it that President Trump actually wants from his dollar? Introduction The US President has heavily criticised the recent interest rate rise implemented by the Federal Reserve (the US Central Bank). And he continues to accuse other economies such as China, the Euro Area and a large number of developing countries, of manipulating their currencies. Even the US Treasury Secretary, Steve Mnuchin, has been indicating his agreement with President Trump, remarking that the US needs to stay guarded against a Chinese 'competitive devaluation'. This would suggest that the US Government wants a weaker dollar. How is the US Dollar performing now? The US economy is strongly outperforming many other developed economies such as the Euro Area and Japanese economies. The government's pro-cyclical tax cuts are fuelling this. Despite a sharp increase in the budget deficit (and the country s national debt), US growth in the second and third quarters of 2018 was around 4% annually. By contrast, the Euro Area growth rate moved below 2% in the third quarter, with evidence of continued further weakening. Markets are increasingly concerned about risks in Europe due to Italian fiscal problems, Britain's exit from the European Union, and German political uncertainties. The IMF has forecast Japan to grow only at around 1% in 2019, and whilst Chinese growth rates are around 6.5%, all other signs such as an impending trade war with the US appear to be contributing to China's slowing economy. Figure 1: economic statistics for selected economies US China Japan Euro Area GDP (2017) $19.39trn $12.24trn $4.87trn $19.1trn GDP growth (2017) 3.8% 6.9% 1.7% 2.1% Life Expectancy (years) Gini coefficient (%) Source: Google statistics RESPONSE Copyright tutor2u 2019 Page 2

3 Indeed, expansionary US fiscal policy is putting a lot of pressure on the Federal Reserve to push up interest rates, and as a result, cause the value of the dollar to rise. ln light of the strengthening US economy and job market, the Fed has had to raise rates eight times since the end of 2015 (see Figure 2). Members of the Federal Open Market Committee point to several more rate rises to come in As money has flowed into the USA from other areas, the dollar has appreciated against major currencies (see Figure 3), and by even more against emerging markets such as China. The Outcome It is believed that these dollar movements will only worsen the US current account deficit, even at a time when China's current account surplus is projected to fall under 1% of GDP in The IMF projects that the US current account deficit will widen to 3% of GDP, or slightly higher, in from around 2.5% in As the current account deficit widens in response to relatively strong US economic performance, there is a considerable risk that the Trump government could introduce more protectionist policies in To do so, however, might risk incurring the wrath of the WTO and bilateral trading partners. It seems therefore that President Trump might prefer to cross his fingers and hope for a weaker dollar instead. Figure 2 US interest rate (Dec 2012 to Dec 2018) Figure 3: US$ to Euro exchange rate (2018) RESPONSE Copyright tutor2u 2019 Page 3

4 5-mark questions 1a Explain how the Gini coefficient is measured, and compare the Gini coefficients of the USA and Japan. 1b Explain the statement ln light of the strengthening US economy and job market, the Fed has had to raise rates eight times 1c Define the term bilateral trade, and explain the role of the WTO in trade liberalisation. 1d With reference to the data, explain the roles of a Central Bank. 8-mark questions 2a The American President continues to accuse other economies such as China, the Euro Area and a large number of developing countries, of manipulating their currencies. Examine two benefits to a developing economy of a weaker currency. 2b Using the data, examine whether the value of a currency always increases at the same time as increases in interest rates. 2c The current account deficit widens in response to relatively strong US economic performance. Examine why this might be the case. 2d Examine two possible reasons why China s GDP growth rate is higher than that of the US. 10-mark questions 3a Despite a sharp increase in the budget deficit (and the country s national debt), US growth in the second and third quarters of 2018 has been around 4% annually. Assess whether tax cuts will always lead to an increase in a budget deficit. 3b As the current account deficit widens in response to relatively strong US economic performance, there is a considerable risk the Trump administration could use more protectionist policies in Assess the extent to which the use of a tariff can help to reduce a current account deficit. 3c Assess the reasons why the US government might want a weaker dollar. 3d Assess the possible factors that could be responsible for the different Gini coefficient values as shown in Figure 1. RESPONSE Copyright tutor2u 2019 Page 4

5 12-mark questions 4a The US economy is strongly outperforming many other developed economies. With reference to the data, discuss whether GDP is a good measure for development. 4b Expansionary US fiscal policy is putting a lot of pressure on the Federal Reserve to push up interest rates. Discuss whether expansionary fiscal policy will always lead to contractionary monetary policy. 4c Discuss the factors that could have led to the trends in movements of the US Dollar to Euro exchange rate, as shown in Figure 3. 4d Discuss the possible impact of growth in the US economy on European economies. 15-mark questions 5a Discuss whether a weaker dollar is definitely desirable for the US economy. 5b Discuss the extent to which a sustained current account deficit is undesirable for the US economy. 5c Discuss the possible economic impacts of a trade war between China and the US. 5d Discuss the possible impacts on the global economy of a government, such as China, manipulating their currency. RESPONSE Copyright tutor2u 2019 Page 5