6.2 - The Global Economy Flashcards
What does ‘economy’ refer to?
All of the economic activity that takes place between the people living in a particular region or country
Why are financial providers affected by what goes on in their local economy as well as the global economy?
- Countries rely a lot on eachother in terms of imports and exports
- Banks may find themselves in competition with businesses based in overseas economies meaning strategic decisions will have to take account of what is going on in other countries
What would happen if the euro were to become weak against the pound?
UK goods would become expensive to European buyers even though the pound price had not changed
What would UK manufacturers have to do if the euro were to become weak against the pound?
- Cut their pound prices
- Try to boost sales in other ways
- Lose sales
What is the MPC responsible for?
Setting Bank rate in the UK
What is Bank rate used to influence?
The demand for and supply of the pound sterling.
What is the goal of the MPC?
To have a stable rate of inflation
What is the result of changes in the sterling’s purchasing power against other countries?
The goods and services that the UK imports from other countries have been more expensive, whilst exports have been cheaper.
Protectionism definition
Policies designed to protect a country’s own economy and labour force
What can protectionism involve?
- A government giving money to one of its industries to preserve jobs
- Imposing import taxes on the goods and services that it purchases from abroad
Why are protectionist policies unpopular with those countries who do not practice them?
They counteract the advantages of free trade
What do the World Trade Organisation (WTO) promote?
Co-operation and trade between its members
What is the main function of the WTO?
To ensure that trade flows as smoothly, predictably and freely as possible
Regional economic union examples:
- The European Union - 28 members
- The Association of South Eastern Asian Nations (ASEAN) - 10 members
- The Caribbean Community (Caricom) - 15 full members and five associate members
How do you measure the performance of an economy?
Gross Domestic Product
GDP definition
A country’s economic activity in terms of its total output of goods and sercices
Why is rising GDP growth seen as a good thing?
It reflects a higher standard of living of the people with higher employment and production
What is a way to express the standard of living of the people of a country?
Find the GDP per capita
GDP per capita formula
GDP per capita = total GDP / total number of people
Negative consequences of too much growth:
- Economy becomes overheated
- Environmental impacts e.g. increase in the burning of fossil fuels
What does it mean if an economy becomes overheated?
There is more demand than supply so businesses push up prices leading to higher inflation
Why must the rate of inflation be taken into account when measuring economic growth?
Some of the apparent increase in GDP may be the result of a general increase in prices rather than because more goods and services are being produced.
What is a boom and bust cycle?
Cycles of rapid growth followed by falling output, followed by a return to growth, and then a return to recession again
Sustainable growth definition
Growth that is controlled enough to be able to continue into the medium and long terms
What is the key to sustainable growth in living standards?
Achieving higher productivity - producing more goods and services with the same amount of resources
What did the UK government do after recognising the limitations of traditional monetary-based measures of the nation’s wealth and well-being?
The ONS designed a ‘hapiness survey’ in which UK households were asked how satisfied they were with their lives
What did critics of the hapiness survey say?
That the survey was a way in which the government could deflect attention from the effects of the economic recession
What is an accepted measure that goes beyond economics?
Human Development Index - it uses measures of a country’s life expectancy, education and income.
What is a fall in growth likely to be accompanied by?
Falling share prices and a lack of investor appetite for shares
What did the UK government do in response to the credit crunch in terms of policies?
Introduced policies aimed at encouraging banks to lend more to creditworthy individuals and businesses
What did holders of variable interest rate mortgages take advantage of?
The fall in interest rates by taking the opportunity to overpay on a monthly basis so that they can pay off the mortgage loans quicker
Stock picking definition
Identifying the companies in which it is still worth investing
Why do businesses that specialise in low-priced products see an increase in sales and profits during an economic downturn?
People are looking for ways to buy basic needs more cheaply.
What is the aldi effect?
A growth in hard discount shops
Why might those who manage to keep their jobs in a time of high unemployment see the real value of their wages/salaries fall?
- Hours are reduced
- Any growth in earnings is beaten by a higher rate of inflation
Why do insurance companies benefit from rising unemployment?
People who still have jobs feel less confident in their job secuirty so may take out insurance that will pay them an income in the event that they are made redundant.
What countries are in BRIC?
- Brazil
- Russia
- India
- China
What countries are in MINT?
- Mexico
- Indonesia
- Nigeria
- Turkey
What has growth in BRIC and MINT led to?
High levels of demand for commodities which has pushed global commodity prices higher meaning a rising level of inflation in those countries that are net importers of commodities
Net importer definition
A country that has a higher value of imported goods than it has for exported goods over a period of time
Conditions for a country to adopt the euro and join the euro area:
- Meet fiscal stability standards
- Have central banks that are independent of the political process
- Low inflation and interest rates
- Established stable currencies over a certain period
Who sets interest rates for the euro area?
The European Central Bank (ECB)
Are interest rates generally the same across all member countries?
Yes
Which countries adopted the euro after the financial crisis?
- Estonia
- Latvia
- Lithuania
Details of Greek economy struggle
- Greek government borrowed large sums of money, financial crisis meant that they could not longer raise money to pay debts
- Greece negotiated a financial rescue package with the EU and the International Monetary Fund and some of its debts were written off
Euro countries that struggled from financial crisis
- Greece
- Ireland
- Portugal
- Spain
- Italy
At what point were struggling euro countries forced to seek help from the EU and IMF?
When they were unable to sell a sufficient volume of bonds at the interest rate that they could afford to pay
What government department is responsible for setting economic and financial policy within the UK?
HM Treasury
What do the MPC decide?
Whether or not to change the level of interest rates
Implications of low interest rates
- Cheap borrowing so people borrow more
- Demand for houses are high so rising house prices
- Low returns on savings
Why has demand for products such as unit trusts on the UK stock market fallen?
People have been turning to less risky products
Is the UK part of the euro area?
No
What is a central aim of the coalition government?
Reduce the huge level of public debt
How did the government attempt to cut their deficit?
- Cut public spending
- Increase some taxes e.g. VAT rose from 17.5% to 20%
How do central banks encourage people to spend?
Cutting their interest rates
