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A Level Economics > 8: Finance and inequality > Flashcards

8: Finance and inequality Flashcards

1
Q

Absolute poverty

A

When an individual or household’s income is not enough to afford basic shelter, food and clothing

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2
Q

What does the World Bank determine as aboslute poverty?

A

Based on amount of people living on less than $1.90 per day

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3
Q

Relative poverty

A

Measures when people are poor compared to others

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4
Q

How is relative poverty measured?

A

Households living on less than 60% of median incomes

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5
Q

Causes of poverty

A
  • Unemployment
  • Low levels of skills/uneducation
  • High cost of living
  • Government poverty (ineffective benefits and tax system) -> falls in real wages
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6
Q

Income

A

Money received on a regular basis i.e. from a job, welfare payments, interest or dividends
If income unevenly distributed = income inequality

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7
Q

Wealth

A

A stock of assets i.e. as a house, shares, land, cars and savings
Unequal distribution of these assets = wealth inequality

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8
Q

Gini co-efficient

A

A / (A+B)
0 = perfect equality
1 = perfect inequality

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9
Q

Causes of income and wealth inequality

A

Inequality in wages (partime and temporary, degree = higher pay, skilled and unskilled, women, discrimination), education and training, welfare payments and taxes (increase less than wages [welfare payments], welfare payments cut, regressive taxes), changes to UK tax system (government frozen tax brackets till 2027 -> workers in higher tac brackets -> fiscal drag), inequality between countries

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10
Q

Measures to reduce poverty

A

Progressive tax
Access to education
National min wage
Welfare benefit
Access to childcare
Flexible working patterns
Price caps
Means tested prescription and dentist/healthcare

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11
Q

Automatic stabilisers

A

Features of government spending and taxation that automatically adjust with economic activity and minimise fluctuations i.e. in a recession govt. spending is high and taxation is low due to unemployment

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12
Q

Discretionary fiscal policy

A

Deliberate changes in govt. expenditure and taxes with the intention of influencing AD

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13
Q

Three dimensions of Human Development Index (HDI)

A

Education - mean number of years of schooling and the expected years of schooling
Life expectancy - range of 25 to 85 years
Living standards - measures Gross National Income (GNI) adjusted to PPP per capita

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14
Q

Countries with highest HDI

A

Switzerland, Norway, Ireland

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15
Q

Countries with lowest HDI

A

South Sudan, Chad, Niger

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16
Q

Limitations of HDI

A

Wide divergence with countries (i.e. North China poorer than South -East)
Only refelcts long term change
Wealth doesn’t equal welfare
Economic welfare depends on several other factors such as: threat of war, levels of pollution, access to clean drinking water etc.

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17
Q

Other indicators of development

A

HPI (Human Poverty Index) - includes: life expectancy, eduation and ability of citizens to meet basic needs. Two types: HPI1 - for developing countries, HPI2 - for developed countries
MPI (Multidimensional Poverty Index) - reports and complements money-based measures by considering deprivations, number of people who are deprived, region, ethncity and other groupings and used for policy making
Access to clean water
Males working in agriculture
Energy consumption per person
Population with internet
Mobile phone per 1000 of population

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18
Q

Non-economic factors influencing growth and evelopment

A

Corruption - in sub-saharan Africa, the money lost from corruption could pay for the education of 10 million children per year in developing countries
Poor governance/civil war - can hold back infrastructure development and is a constraint on futurue economic development. Could destroy current infrastructure and force people into poverty
Vulnerability to external shocks - i.e. earthquake prone country is likey to find it hard to develop their infrastructure and people might be pushed into poverty. For example Nepal was one of the most poor countries -> 2015 earthquake pushed more people into poverty

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19
Q

Economic Facotrs influencing growth and development: primary product dependency (1/11)

A

Primary products are raw materials in industries such as agriculture, mining and forestry
For countries whose man exports are primary products, their ability to pay foreign debts and for imports relies on this

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20
Q

Economic Facotrs influencing growth and development: volatility of commodity prices (2/11)

A

Volatile commodity prices -> incomes hard to predict
Fall in price -> fall in export incomes -> hard to fund their infrastructure and education
Relying on primary products -> not sustainable, since they could be over extracted and run out

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21
Q

Economic Facotrs influencing growth and development: levels of savings and investment (Harrod-Domar model) (3/11)

A

Limited wealth in developing countries -> money can’t be saved and only afford to spend in the short run -> focused on immediate needs i.e. food and safe water -> without sufficient savings, there is inadequate capital amount
Africa’s saving rate arounf 17%, average in middle income countries is 31% -> makes it more expensive for African public and private sectors to get funds since they have higher borrowing costs -> impedes capital investment
Harrod-Domar model - states investment, saving and technological change are require in an economy fo economic growth. The rate of growth increases if the savings ratio increases -> leads to increased investment and technological progess -> leads to higher productivity

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22
Q

Economic Facotrs influencing growth and development: foreign currency gap (4/11)

A

Exists when the country is not attracting sufficient capital flows to make up for a deficit in the capital account on the balance of payments
The value of the current account deficit is larger than the value of capital inflows

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23
Q

Economic Facotrs influencing growth and development: capital flight (5/11)

A

When capital and money leave the economy through investment in foreign economies
Triggered by an economic threat (i.e. hyperinflation and rising tax rates)
Can worsen an economic crisis and cause a currency to depreciate

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24
Q

Economic Facotrs influencing growth and development: demographic factors (6/11)

A

The population can impact the growth and development of a country
There is a link between keeping birth rates down and fighting hunger, poverty and environmental damage
Rapid population growth has complicated efforts to reduce poverty and eliminate hunger in Africa

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25
Q

Economic Facotrs influencing growth and development: debt (7/11)

A

The debt crisis emerging in the developing world threatens the fight against poverty and inequality

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26
Q

Economic Facotrs influencing growth and development: access to credit and banking (8/11)

A

Without a safe, secure and stable banking system, there is unlikely to be a lot of saving in a country -> makes investment difficult

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27
Q

Economic Facotrs influencing growth and development: infrastructure (9/11)

A

Poor infrastructure discourages MNC’s from setting up premises in the country
Production costs increase where basic infrastructure, such as a continous supply of electricity, is not available

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28
Q

Economic Facotrs influencing growth and development: education and skills (10/11)

A

Important for developing human capital
Adequate human capital ensures the economy can be productive and produce goods and services of a high quality
Helps generate employment and raise standards of living

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29
Q

Economic Facotrs influencing growth and development: absence of property rights (11/11)

A

Weak or absent property rights mean entrepreneurs cannot protect their ideas so do not have an incentive to innovate

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30
Q

Market Oriented (non-interventionist) strategies influencing growth: trade liberalisation (1/6)

A

No protectionist barriers i.e. tariffs, quotas or regulations
Can increase world GDP as output increases when countires specialises -> living standards increase -> more economic growth
Firms can grow as they can export more

31
Q

Market Oriented (non-interventionist) strategies influencing growth: promotion of FDI (2/6)

A

The flow of capital from one country to another
Create employment, encourage the innovation of technology and help promote long term sustainable growth

32
Q

Market Oriented (non-interventionist) strategies influencing growth: removal of government subsidies (3/6)

A

Govt. subsidies may distort price signals by distorting the free market mechanism
Free market economists may argue it could lead to government failure
Has negatve effect on govt. budget and can cause excessive debts
Can minimise absolute poverty and ensure a minimum standard of living

33
Q

Market Oriented (non-interventionist) strategies influencing growth: floating exchange rates (4/6)

A

Value of ER in a floating system determined by forces of supply and demand
Govt. does not have to worry about gold and foreign currency reserves
HOWEVER, currency will be volatile and will make it difficult for importers and exporters

34
Q

Market Oriented (non-interventionist) strategies influencing growth: microfinance scheme (5/6)

A

Borrowing small amounts of money from lenders to finance enterprises
Small loans for unbankable -> allows them to break away from aid and gives borrowers financial interdependence (many are women)
Detach poor from high interest, explotative loan sharks -> reduce the isses of the saving gap
Most people unable to pay their loan back so rely on new loands to repay old ones

35
Q

Market Oriented (non-interventionist) strategies influencing growth: privatisation (6/6)

A

Assets transferred from public sector to private sector
Private sector has incentive for profit -> so they operate efficiently

36
Q

Interventionist strategies influencing growth: development of human capital (1/6)

A

Education + training -> improve productivity
By developing human capital, the country can move their production up the supply chain from primary products, to manufactured goods and services which can earn them more
Shifts LRAS right -> increase PP

37
Q

Interventionist strategies influencing growth: protectionism (2/6)

A

Can help reduce a trade deficit -> importing less due to tariffs and quoatas on imports -> increases AD

38
Q

Interventionist strategies influencing growth: managed exchange rate (3/6)

A

Combine fixed and floating ER. Currency fluctuates but it does not fully float on a free market
More stability than floating system but less intervention than fixed

39
Q

Interventionist strategies influencing growth: infrastructure development (4/6)

A

i.e. transport, energy, water, telecoms
May cause environmental damage
Projects often suffer from bribery and corruption

40
Q

Interventionist strategies influencing growth: promoting joint ventures with global companies (5/6)

A

Partnership with two firms
Opens up new markets for firms
Benefits of FDI, without the negatives of exploitation and some of the profits remain in the country

41
Q

Interventionist strategies influencing growth: buffer stock schemes (6/6)

A

Buy up harvests during surpluses -> sell the goods onto the market when surpluses are low
Reduce price volatility and helps farmers incomes be stable
HOWEVER, storage difficult + expensive and goods = perishable

42
Q

Other strategies influencing growth: industrialisation: Lewis Model (1/6)

A

Explains how a developing country which focuses on agriculture could move torwards manufacturing
Workers from agriculture are attracted to the higher wages in the manufacturing sector
Shift from traditional state to industrial state

43
Q

Other strategies influencing growth: development of tourism (2/6)

A

Can create thousands of jobs and help shift a developing country away from depending on primary products.
Developing countries have a high MPC -> creates multiplier effect
Diversifies country and could make country attractive to FDI i.e. Visit Rwanda

44
Q

Other strategies influencing growth: development of primary industries (3/6)

A

Some developing countries have an abundance of raw materials -> govts. may exploit this advantage and develop the industry so the country can have a comparative advantage

45
Q

Other strategies influencing growth: fairtrade schemes (4/6)

A

Ensures farmers receive fair price for their goods

46
Q

Other strategies influencing growth: aid (5/6)

A

Given to countries to invest into infrastructure
Can help fill the savings gap
Aid provides temporary assistance to a country i.e. humanitarian aid offered to countries after conflicts or natural disasters

47
Q

Other strategies influencing growth: debt relief (6/6)

A

Partial/total forgiveness of debt
High debt -> finance diverted from infrastructure, education and healthcare
Can allow a country to import more and improve standard of living
HOWEVER, may encourage more borrowing -> more corruption

48
Q

Awareness of the role of international institutions and Non-Government Organisations in influencing growth: world bank (1/3)

A

189 countries
Aims to reduce poverty and increase prosperity
Can loans funds to member countries
Involved in several projects by providing microcredit, supporting education and rebuilding after earthquakes

49
Q

Awareness of the role of international institutions and Non-Government Organisations in influencing growth: monetary fund (IMF) (2/3)

A

190 countries, provides advice on money and fiscal policy. Promotes monerary cooperation between countries -> aims to help free trade globally
Promotes ER stability. Can also support borrowing for members

50
Q

Awareness of the role of international institutions and Non-Government Organisations in influencing growth: NGOs (3/3)

A

Influence on environmental policy, women’s issues, development and human rights
Correlation between NGO’s and financial aid given to a country
Can be funded by governments, firms or private individuals, but they are not part oof governments or for profit businesses
Cam lobby governments

51
Q

Market rigging

A

The act of firms coming together to interfere in a market wuth the intention to stop it working as it is supposed to, so that firms can gain an unfair advantage

52
Q

The role of central banks: Implementation of monetary policy (1/4)

A

Influence the manipulation of interest rates, the supply of money and credit, and the exchange rate
In the UK the MPC alters interest rates to control supply of money. They are independent from the government
Interest rates used to help meet government target of price stability
The bank controls base rate

53
Q

The role of central banks: Banker to the government (2/4)

A

Provides services to the central government
Collects payments to the governments and makes payments on behalf of the government
Maintains and operates deposit accounts of the government
Manages public debt and issues loans
Can also advise the government

54
Q

The role of central banks: Banker to the Banks - lender of last resort (3/4)

A

Bank of England will lend money if the insititution is risky or collapsing
Happens when no other way to borrow money
Protects individuals
Prevents a ‘run on the bank’ when consumers withdraw their accounts in a panic
Try to be avoided by banks

55
Q

The role of central banks: regulate banking industry (4/4)

A

Helps to ensure behaviour of banks is clear to insititutions and individuals who conduct business with the bank
e.g. PRC, PFA, FCA

56
Q

Automatic stabilisers

A

Features of government spending and taxation that automatically adjust with economic activity and minimise fluctuations i.e. in recession govt. spending is high and taxation is low due to higher unemployment. In a boom, welfare benefits automatically lower since more workers are employed

57
Q

Discretionary fiscal policy

A

Fiscal policy implemented through one-off policy changes. Involves deliberate changes in government expenditure and taxes with influencing AD

58
Q

Fiscal deficit

A

Government spending higher than revenue in one year

59
Q

National debt

A

Total amount of money government has borrowed (accumulative debts)
Fiscal deficit rises, national debts rises (an vice versa)

60
Q

Capital expenditure

A

Spent on assets, which can be used multiple times i.e. govt. expenditure on roads or building a school

61
Q

Current expenditure

A

Spending which recurs. This is on goods and services which are consumed and last for a short period of time i.e. drugs for healthcare

62
Q

Transfer payment

A

Welfare payments from the govt. -> aim to provide a min standard of living for those on low incomes i.e. state pension and child benefits

63
Q

Why has government debt increased in last 15 years?

A

Unforseen events i.e. financial crash, COVID

64
Q

The significance of differing levels of public expenditure as a proportion of GDP on:

A
  • Producitivity and growth - supply-side policy -> LRAS shift right -> increases long-term sustainability of economic growth
  • Living standards - benefits/pension subsidies
  • Equality - redistribution of income via benefits/pensions
  • Crowding out - govts. may have to fund spending via taxes/budget deficit -> fewer funds for private sector -> crowds them out by discouraging spending and investment due to high interest rates by govt. Can also refer to govt. provision of good/service otherwise provided by private sector
  • Taxation - debt = too high -> austerity
65
Q

Progressive tax

A

Tax increases with income (direct)

66
Q

Regressive tax

A

Fixed tax for everyone (indirect)

67
Q

Proportional taxes

A

Fixed tax rate for all payers i.e. 20% of a persons income

68
Q

The economics effects of changes in direct and indirect tax rates on other variables

A
  • Incentives - direct income tax rise -> incentive to work falls
  • Tax revenues - laffer curve (see diagram)
  • Income distribution - redistribute income via transfer payments. Indirect taxes have oppositve effect as regressive
  • Real output and employment - expansionary fiscal policy -> reduce direct tax -> (see diagrams for cuts in corporation tax and income tax cuts)
  • Price level - expansionary fiscal policy -> may lead to inflationary pressure
  • (If expansionary FP) Trade balance - 1. reduce costs -> exports rise 2. Attract FDI -> more deand for £ -> appreciates -> exports fall -> deficit on trade 3. increase in income -> increase demand for imports -> worsen trade 4. protectionism (tariff)
  • FDI flows - corporation tax falls -> increase FDI (demand for £ rises) -> LRAS shift right
69
Q

Cyclical deficit (automatic stabilisers)

A

Is a temporary deficit, related to the business cycle. May occur during recessions -> govts. may increase spending to stimulate the economy

70
Q

Structural deficit (discretionary)

A

Due to an imbalance in the revenue and expenditure of the govt. so it exists at every point in the business cycle

71
Q

Factors influencing size of fiscal deficit

A
  • Business cycle
  • The housing market - stamp duty is a tax on homes -> therefore affects govt. revenue and deficit
  • Political priorities - if they want to cut deficit they will implement a contractionary fiscal policy
  • Unplanned events (COVID, WWII, financial crisis)
72
Q

Factors influencing size of national debt

A
  • Fiscal deficit rises, national debt rises
  • Fiscal surplus, national debt falls

More debt higher IR

73
Q

The siginificance of the size of the fiscal deficits and national debt

A

Cost of borrowing could increase -> if confidence is lost in govt. to repay debt -> interest rates rise -> lead to higher taxes and austerity measures

A Level Economics (15 decks)

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