2.4 Flashcards
what is globalisation?
the process of greater integration and interconnectedness between countries
what does globalisation usually include?
free movement of goods/services, labour, capital and increased cultural exchange
what is the (IMF) International Monetary Fund?
the process by which an increasingly free flow of ideas, people, goods/services, capital and leads to the integration of economies and societies
what is the (FDI) Foreign Direct Investment?
the greater freedom of movement of capital enabling firms to invest outside their country of origin
what may a greater freedom of movement in capital do?
lower costs of production and improve economic prospects and job opportunities in the invested country
what are positives of the FDI?
increased labour pool with the condition that they contribute to the economy
better training; increasing human capital
creating new jobs; increasing income
competition; increasing social mobility
what are the negatives of the FDI?
reduced labour pool
loss of tradition/culture
ethical standards exploitation
inequality; gains of FDI are often captured by powerful elites
what does world trade rising as a proportion of world GDP mean?
export opportunities increase and therefore has a significant effect on economic welfare, this led to a greater dependency on trade as a proportion of GDP
what do countries benefit from because of world trade rising as a proportion of world GDP?
increased specialisation where they have a comparative advantage which lowers their production costs and improves efficiency
what does increased migration mean as a result of globalisation?
globalisation allows the best talent to move quickly and easily creating a ‘brain drain’.
what can less skilled workers do because of increased migration?
undercut wages in developed economies as the welfare of poorer countries seek to better their standard of living
what has increased globalisation done to traditional cultures?
damaged them increasingly and the proliferation of MNCs creates a uniformity of many economies and arguably less cultural diversity
what have traditional cultures struggled to do?
struggled to accommodate new ones leading to social tension
what are the factors contributing to globalisation in the last 50 years?
trade liberation
capital market liberalisation
political change
what is trade liberation?
the WTO has assisted in the reduction/removal of trade barriers and there has been a greater proliferation of trade agreements
what is capital market liberalisation?
significant relaxation on rules and regulations on movement of capital which can move freely or at very low cost quickly across the globe
what has political change meant?
that larger countries e.g China which were previously largely closed to trade have become increasingly integrated into the global economy and play a vital role in creation of new markets and the provision of low cost labour
what are the 4 indicators of growth
GDP per capita
health
education
(HDI) human development index
what is GDP per capita
the value of total GDP divided by population of a country
what are the limitations of GDP?
no indication of distribution of income or welfare
GDP may need to be recalculated in terms of purchasing power so it can account for international price differences
large hidden economies e.g. black
what is the purchasing power?
the cost of living and inflation rate in each country
what does literacy and health show?
how successful government policies have been and information on country’s infrastructure
what has happened as of 2015 in regards to health and literacy?
the proportion of people in poverty halved and 90% of children had primary education and 90% had access to improved water sources
what can be given to show information on education and health?
life expectancy
what is the human development index (HDI)?
education, life expectancy and standard of living measured by real GNP
what does a HDI value close to 1 suggest?
0?
high economic development
low economic development
what are advantages and limitations of HDI?
doesn’t consider how free people are politically
doesn’t take environment into account
doesn’t consider distribution of income
allows for comparisons between countries
what are developed countries?
ones with high levels of economic growth and stable economies
what do developed countries have?
long life expectancies
high income per capita
high levels of education
slow population growth
low mortality rates and birth rates
urban and city populations are large
dominant industrial sector
weaker agricultural sector
what do developing economies have?
low life expectancies
low or middle incomes
high mortality rates
high dependency ratio
low GDP
fast population growth
low levels of education
poor standard of living, nutrition, healthcare
low savings rate
gives examples of emerging economies. (BRIC)
Brazil
Russia
India
China
what do emerging economies have?
fast growth
recent industrialisation
significant influence in global affairs
what are mean and median incomes?
average income in a country measured by mean and median
what is mean income?
total GDP/number of people
what is median income?
middle value
what does it mean if a country can exploit their comparative advantage in a good?
they can produce a good at a lower opportunity cost to another.
when does absolute advantage occur?
when a country can produce more of a good with the same inputs
what are positives of specialisation in the production to trade?
greater world output, gaining in economic welfare
outward shift in the PPF curve
what is a negative of specialisation in the production to trade?
less developed countries use up their non-renewable resources too quickly, so they might run out
what is the free trade area?
where countries agree to trade goods with other members without protectionist barriers
what is the customs union?
countries that have established a common trade policy with the rest of the world
what is the common market?
an establishment of free trade, a common external tariff and allowing of free movement of capital
what are monetary unions?
members sharing the same currency and use the same interest rate, member countries are required to control their government finances.
what are the 4 convergence criteria needed to be met to join the Euro?
- budget deficits cannot exceed 3% of GDP
- Gross National Debt has to be <6% of GDP
- inflation has to be <1.5% of the 3 lowest inflations of countries
- to ensure exchange rate stability average government bond yield has to be <2% of yield of countries with lowest interest rates
when is the optimal currency zone creates?
when countries achieve real convergence
what are the costs and benefits of trading blocs?
trade creation and diversion
reduced transaction costs
EOS
enhanced competition
migration
what do cheap imports mean for standards of living?
loss of jobs in the domestic industry
increased customer choice in developed countries
high dependence on imports imbalancing the economy
What are exchange rates?
the price of one currency in the terms of another, determined by supply and demand
what happens if demand for one currency goes up ?
supply?
its price (exchange rate) will go up
Price (exchange rate) will go down
What are the 3 factors influencing demand?
demand for uk products
Interest rates attracting or pushing away foreign investment
Rate of FDI
What is transactions demand?
demand for one currency derives from people wishing to buy goods/services from that country e.g when producing products on demand in the world stage (petrol)
what is speculative demand?
higher interest rates attract speculators to the UK banks to achieve a higher return
foreign currency dealers will speculate whether a country will appreciate or depreciate in the future
What are the 3 factors influencing supply?
demand for imported products
Interest rates attracting or pushing away foreign investment
A fall in uk interest rates
In the short run what will depreciation make imports?
More expensive
What does it mean if the import is price inelastic (eg petrol)?
total spending on the import will increase this can causes serious problems for an economy and worsen the current account
What in particular causes inflationary pressure in the economy?
the rise in prices, it’s very difficult for a government to control this as it causes cost push inflation
What is cost push inflation?
a type of information that occurs when the cost of production increases leading to higher prices for goods/services
Why is it easier in the long run to substitute domestic products for imported ones?
because the economic agents become more aware of increased prices on imports they will try to change their spending habits (petrol for cars to other modes of transport)
What 5 things are an impact of exchange rate changes on firms assuming the pound is strong?
AD
GDP
employment
Inflation
Current account
What happens in regards to AD when the pound is strong and exchange rates change?
It encourages imports and discourages exports leading to a fall in AD affecting firms assuming a whole in the UK
What happens in regards to GDP when the pound is strong and exchange rates change?
output and investment of firms will be cut in the short term leading to a fall in GDP
What happens in regards to employment when the pound is strong and exchange rates change?
Reduced output leading to lower employment as firms lay off workers
What happens in regards to inflation when the pound is strong and exchange rates change?
Cheaper imports and falling AD leading to lower inflation reducing costs for firms
What happens in regards to current account when the pound is strong and exchange rates change?
Fall in exports and rise in imports leading to a worsening of the balance of payments
Where will global investors who have significant sums of money to deposit in banks look to place it?
In the country where they get the best return ie where the interest rate is the highest this may mean that investors will have to sell their dollars and buy pounds to deposit in the UK this increased demand for Uk pounds increases the exchange rate
what does an increased exchange rate mean in regards to exports?
It makes them relatively less price competitive and makes imports more attractive this will make it harder for UK firms to export their goods and services
What does an increased exchange rate mean for firms that import goods/services?
they will find that their costs have reduced making them more competitive
what 3 things do exchange rates impact on?
firms, workers, consumers
how do exchange rates impact firms? (high and low exchange rates)
a high exchange rate makes exports less price competitive and makes imports more attractive therefore harder to sell exports
a low exchange rate makes exports more price competitive and makes imports less attractive therefore easier to sell exports
how do exchange rates impact workers? (those who work in imports and those who work in exports)
those working in exports will find a decrease in demand, therefore potentially income when exchange rates are high
whereas those working in imports when the exchange rate is high will find more is demanded from them, so may have to work more and as a result increase wages
how do exchange rates impact consumers? (when the £ is strong and when the £ is weak)
if the £ is strong then consumers will demand more imports as they are cheaper
but if the £ is weaker then consumers will demand more exported goods/services as they are cheaper
what is hot money flows?
when the UK increases interest rates then international money markets holding money in UK institutions will yield a greater return, therefore currency will be moved to the UK which will increase demand for the stirling
what impact do interest rates have on exchange rates?
if the Bank of England decides to cut interest rates, then international investors will be more likely to move their money to countries with higher interest rates to gain more reward, this will reduce the demand fro £s and cause a depreciation in the exchange rate
