Chapter 1-5

Question 1

Globalisation

Answer 1

Increased integration of economies around the world

Question 2

Causes of globalisation (4)

Answer 2

Improvements in transport
Improvements in IT
Containerisation
Trade liberalisation

Question 3

Characteristics of globalisation

Answer 3

Ideas/people/finance/trade/businesses can move freely between countries

Question 4

Economic integration

Answer 4

Process by which countries coordinate to reduce trading barriers and harmonise monetary and fiscal policy

Question 5

Trading bloc

Answer 5

A group of countries that join together and agree to increase trade with another

Question 6

Bilateral/multilateral agreements

Answer 6

Agreement to reduce tariffs and quotas between two/or more countries

Question 7

Trade creation

Answer 7

Movement from a high cost domestic producer to a low cost producer inside the trading bloc

Question 8

Actions to reduce current account deficit (4)

Answer 8

Supply side policy
Expenditure reducing policy
Protectionist policy
Devaluation of currency

Question 9

Problem with current account deficit (2)

Answer 9

Need to finance import expenditure with foreign loans and foreign investors take out domestic profits therefore unsustainable deficit

Question 10

Components of capital and financial account

Answer 10

Direct investment
Portfolio investment
Financial derivatives
Reserve assets

Question 11

Terms of trade

Answer 11

Relationship between prices of exports and prices of imports

Index of exports prices / Index of Imports prices

Question 12

Benefit of an improvement in ToT

Answer 12

Exports have higher purchasing powered so can afford to buy more imported goods therefore standard of living increases

Question 13

Factors effecting Terms of Trade (3)

Answer 13

Relative inflation rate
Relative productivity rate
Exchange rate

Question 14

Effects of high unemployment (3)

Answer 14

Lower Standard of Living
Lower profits for firms
Worsen budget balance

Question 15

Standard of living

Answer 15

The degree of wealth and material comfort available to consumers in an economy, often measured by GDP per capita

Question 17

Comparative vs absolute advantage

Answer 17

Comparative when a country can produce at a lower opportunity cost and absolute when can produce more of a good

Question 18

Theory of comparative advantage

Answer 18

If a country has a comparative advantage in the production of a good and they specialise in that good, global output will increase

Question 19

Globalisation on the economy, firms and consumers

Answer 19

Economy - world GDP and living standards increase
Firms - low labour and production cost increase economies of scale. But small firms can’t compete.
Consumers - greater consumer choice and lower prices

Question 20

Globalisation on government, workers and the environment

Answer 20

Government - MNC’s use transfer pricing so gov’t lose hundreds of billions in tax revenue.
Deindustrialisation in developed countries means more spending on welfare
Workers - increased international opportunities because of IT and transport improvements. Unemployment in developed countries.
Environment - race to the bottom as MNCs attracted to lower environmental and labour regulation

Question 21

Diderot effect

Answer 21

Spiralling consumption results in dissatisfaction with existing goods and unhappiness

Question 22

Advantages of specialisation (Firms, consumers and economy)

Answer 22

Firms increase output so EoS and larger markets
Consumers have lower prices and increased choice
Economic growth and living standards increase

Question 23

Disadvantages of specialisation (4)

Answer 23

Bad for uncompetitive countries
Global monopolies emerge
Dangers of dumping (selling at below average cost)which can cause unemployment
Overspecialisation

Question 24

assumptions of comparative advantage (3)

Answer 24

No transport cost
No trade barriers
Constant LRAC

Question 25

Reasons for protectionism (4)

Answer 25

Protect infant industries
Protect jobs
Retaliation
Reduce CAD

Question 26

Absolute poverty

Answer 26

When a person is unable to afford basic necessities such as food, clean water and shelter. $1.25 in 2005 GDP PPP.

Question 27

Relative poverty

Answer 27

When a person is earning less than a certain income threshold in a particular country

Question 28

Factors effecting poverty (4)

Answer 28

Infrastructure Education Economic growth Aid

Question 29

Gini coefficient

Answer 29

A measure of income inequality. The higher the Gino coefficient to 1, the more income inequality. A/A+B

Question 30

Income vs wealth inequality

Answer 30

Income is when the best paid workers take home more income than the rest of the country’s workers and wealth is when wealth is shared unequally between a population

Question 31

Causes of inequality (4)

Answer 31

r>g Minimum wage rate Taxation and benefits system Inheritance

Question 32

What is the r>g hypothesis?

Answer 32

If wealth increases more quickly than income, then rich people with assets to invest get wealthier at a higher rate than poor people

Question 33

Factors effecting exchange rate (4)

Answer 33

Imports/exports Tourism Speculation Interest rates

Question 34

Appreciation to current account

Answer 34

Appreciation - value of £ increases - each £ buys more $ - higher purchasing power - increase imports

Question 35

Consequences of a depreciation (3)

Answer 35

Economic growth Demand pull inflation FDI flows

Question 36

Floating exchange rate

Answer 36

The exchange rate is determined by the forces of supply and demand

Question 37

Fixed exchange rate

Answer 37

The value of one current is fixed to the value of another

Question 38

Managed exchange rate

Answer 38

The government or central bank will intervene to keep exchange rate within a certain bracket by changing interest rates and foreign currency reserves

Question 39

How to revaluate an exchange rate

Answer 39

Increase interest rates or sell foreign reserves

Question 40

Benefits of a floating exchange rate system (3)

Answer 40

No need for currency reserves (no risk of speculative attack Current account deficit corrects naturally (eval - Marshall Lerner) Freedom for domestic monetary policy

Question 41

Cost of floating

Answer 41

Volatility means it is harder to trade and invest

Question 42

Benefits of a fixed exchange rate

Answer 42

Reduce uncertainty in economy | Reduces costs of some trades (hedges / options)

Question 43

Costs of fixed exchange rate

Answer 43

Speculative attacks | Side effects of changing interest rate

Question 44

Marshall Lerner condition

Answer 44

Currency depreciation will only correct a current account deficit if PED (exports) + PED (imports) >1

Question 45

Actions to reduce current account deficit (4)

Answer 45

Supply side policy Expenditure reducing policy Protectionist policy Devaluation

Question 46

Components of Capital and Financial account (4)

Answer 46

Direct investment Portfolio investment Financial derivatives Reserve assets

Question 47

Why a current account deficit is bad (3)

Answer 47

real GDP falls Sell assets to foreign investors in financial account Highlights lack of competitiveness

Question 48

Why a current account deficit is not so bad (2)

Answer 48

Exchange rate self corrects over time | In the long run spending on capital and technology can help the economy grow