4.5.4 Macroeconomic Policies in a Global Context

Question 1

Austerity?

Answer 1

Economic policy aimed at ↓ gov budget deficit through ↑ gov revenue (by tax ↑ and/or ↓ gov spending)

Basically contractionary fiscal policy

Question 2

How can firms improve the competitiveness of their products?

Answer 2

By investing in new capital equipment to raise productivity

Investing in capital equipment allows firms to enhance their production capabilities.

Question 3

What are some supply-side policies that governments can use to improve international competitiveness?

Answer 3

Measures include:
* Increasing occupational mobility
* Ensuring macroeconomic stability
* Public sector reform to reduce red tape (excessive admin/regulations)
* Privatisation
* Encouraging immigration
* Promoting competitiveness through competition policy
* Providing incentives for investment such as tax breaks

Question 4

Why may it not be simple for governments to introduce supply-side policies to improve international competitiveness?

Answer 4

• Time lag (e.g. takes long time to plan and build extra schools to improve education and training)
• Some policies may be controversial (e.g. trade union reforms)
• Difficulties in financing these policies

Question 5

What are some measures that governments can use to improve a fiscal deficit/national debt?

Answer 5

• Reduce gov spending/raise taxes
• Promote economic growth through SSPs = firms grow = more corporation tax revenue
• Issue bonds to raise finance

Question 6

What are some measures that governments can use to reduce poverty/inequality?

Answer 6

• Income redistribution through progressive taxes + welfare benefits - but can reduce incentive to work harder + Laffer curve
• National Minimum Wage
• Increasing accessiblity to education

Question 7

Exogenous/External shock?

Answer 7

• An unexpected event beyond the control of the country’s officials that has a large negative impact on the economy

Question 8

Economic benefits of TNCs for LEDCs?

Answer 8

• Help overcome the savings gap as they provide an external source of capital and ↑ employment

Question 9

Economic benefits of TNCs for MEDCs?

Answer 9

• Provides an opportunity to diversify the economy and ↓ unemployment

Question 10

Costs of TNCS?

Answer 10

• ↑ tax avoidance

Question 11

Transfer pricing?

Answer 11

• TNC sets internal prices for goods and services traded between its divisions in different countries, often to move profits to countries with lower tax rates and reduce its overall tax burden.

• Division in high-tax country exports components to subsidiary in low-tax country, prices them artifically low such that large profit is made in the low-tax country
• Or division in low-tax country exports components to division in high-tax country at artifically high price so more profit is made in low-tax country and less in high-tax country

Question 12

How can a government control TNC operations?

And what limits this?

Answer 12

Regulating transfer pricing

• The tax rules are complex and difficult to apply and regulate
• Costs to HMRC to challenge firms that do not declare profits truthfully - + takes time

Question 13

What are the problems facing policymakers?

Answer 13

• Inaccurate info - collecting economic data can be difficult
• Risks and uncertainties - if full implications are somewhat unknown (e.g. Brexit)
• Inability to control external shocks - unable to predict consequences (e.g. COVID-19)