Content Flashcards
Factors that lead to development
Taxation
Appropriate use of tech
Empowerment of women
Y distribution
Political stability
Lower corruption
Types of financial market regulation
Ban market rigging
Prevent sale of unsuitable products
Max ir (no high ir=no incentive for high risk)
Deregulation (increase comp by reducing red tape)
Deposit insurance
Ring fence cb from ib (lower systemic risk)
Limits on bank lending (using ratios)
Financial market regulation + - and eval
+
Lower systemic risk and instability (more stable I and rational decisions, better risk management, easier and cheaper to get liquidity, better able to absorb shocks)
Protect consumers by ensuring firms act legally and fairly
Maintain confidence in financial sector
Prevents bank runs and panic
-
Moral harard (liquidity assurance + bailours)
Regulatory capture (Limits + of regs)
Info failure (asymmetric - regulators don’t know next product bank is working on)
unintended consequences (high ir = shut down, max ir = xs d)
Admin + enforcement costs
Eval
Balance needed to protect against systemic risk but maintain profitability
Regulation should increase equity but without damaging efficiency
Costs vs benefits of individual policies
Increasing LRAS for developing countries by
All normal Q^2CELL
Land
Increase fertilisation
Better agricultural methods
Building up instead of sideways
Labour
Increase health and education/training
Institutional
Banking system
Legal system
Health and education infrastructure
Factors affecting Sm
Reserve req
Repo/bank rate
Open market operations
Limitations of CA model
Perfect knowledge (consumers know where lowest p are and buy from there)
No transport costs
No eos
No protectionism
EX rates ignored
Non p comp ignored
I ignored
No externalities
Increase d for currency due to
Increase relative ir
Speculators anticipate increases in p
More fdi
More y abroad
More competitive
More confidence in economy
Market based policies to increase development and + -
Privatisation
Deregulation
Trade liberalisation
Reduce G
+
More ae
No gf (corruption and red tape)
More comp
More fdi
-
Need suitable infrastructure
Metis goods
Public goods
More y inequality
Protectionism
Interventionist policies to increase development and + -
M sub
Protectionism
Ex rate manipulation
Regulation
Nationalisation
Increase g
+
Increased infrastructure
Public goods
Merit goods
Employment and training in public sector
Stable macroeconomy (fiscal and monetary policy)
Welfare and pensions
-
Inefficiency
Corruption
Gf
Ai xi as no profit motive
More debt as high g
How to increase int competitiveness
P comp
Non p comp
Higher ability to attract fdi and fops
Causes of globalisation
Trade liberalisation
Mncs
Tech advancement
Mobility of labour and capital
Characteristics of globalisation
Free movement of fops
Int trading becoming larger proportion of all trade
More integration of production
More mncs
Fdi for developing country -
-
Employment benefits maybe st
Tax advantages/avoidance and policy making
Capital production instead of labour
Environmental costs (May strip resources and leave)
Policies to increase trade
M substitution
X promotion
Trade liberalisation
Fiscal discipline
Privatisation and deregulation
Bilateral trade agreements and ptas
Diversification
How increase s of currency
Lower relative ir
Speculators anticipate reducing p
Lower fdi
Increase y domestically (more m = more s)
Economic development leads to
More wellbeing qol standards of living
Reducing poverty
More health education shelter food
More freedom and choicr
Financial account bop contains
Portfolio I transactions
Fdi sent and received
Reserves (currency and gold)
In sr w are fixed as
Strength of Tu
High min w
High u benefits
Lt anticipated deflation -
Delayed spending (reduces c i ad y increase u … spiral)
Positive real ir (more saving less c i ad …)
Increasing real value of debt
Lower profits for firm as less c so lower y for people
St unanticipated deflation +
Lower p so better living standards
Lower costs of production so more profit
Lrpc concs
Increasing ad will not increase growth in lr
Need ssps
Assets on balance sheet
Cash
Reserves in boe
Interbank lending
St investments (bonds)
Lt investments (bonds shares)
Advances
Fixed assets
Leverage ratio
Capital / loans + lt investments
Solns to developing country indebtedness
Debt relief
Reschedule
Debt swaps
Low and stable i +
Higher w=more morale
Natural c (not encouraged)
Can keep u low in recession by not increasing w in line with inflation
Reduced value of debt
Fiscal drag (+higher p means more vat and public sector wages decline in real terms)
Real gdp to measure economic growth problems
Double counting (fixed by final value)
Informal activity (illegal, bm, diy, gardening)
Errors due to vast data collection
Nothing about individual y
Negative externalities (quant not quality)
Y inequality
Health education freedom gender equality working conditions
Capital vs consumer output
Causes of a ca deficit
D side
Strong domestic growth
Recession overseas
Strong ex rate
S side
Low I productivity reliability quality
High relative i and ulc
Depletion of resources
Consequences of a ca deficit
(X-m) decreases so ad decreases
Debt burdens (+lose faith to payback)
Weaker ex rate causes m inflation
Policies to rectify ca deficit and eval
Weaken currency - by lower ir or qe (Marshall Lerner, m inflation, retaliation)
Contractionary monetary or fiscal policy - lower y means lower m (conflicts of interest, confidence, multiplier, mpm, level of output gap)
Protectionism (retaliation, m inflation, wto rules, lazy dom comp, high p)
SSPs - increase lras reduce i increase x (standard -s)
Eval
Targeted solns needed
Conflict of objectives
Cause of ca deficit (d vs s side)
Time lags
Cost
Size of deficit (is it a problem)
Reasons for taxation
Gov rev
Influence macroeconomy
Reduce y inequality
Correct mf (demerit)
Protectionism
Economic growth + - and eval
+
More profit = more I higher w and more jobs = more disposable y
Fiscal dividend (y, vat, corporation, tariffs)
-
High inflation reducing purchasing power and living standards
Ca deficit
More income inequality
Environmental costs
Eval
No guarantee of equal distribution (y inequality)
Sustainability in lr (without inflation and environmental costs)
Need inclusive growth
Need sustained and continuous over time
Ssps
Labour market reform
Lower benefits wmin tu power
More immigration
More education training health
Tax reform
Lower y and corporation
Comp policy
Privatisation
Deregulation
Trade liberalisation
Increase I and infrastructure
Lower wars natural disasters pandemic
All will increase Efficiency Productivity Incentives Comp
Ssps - / eval
No guarantee of success
Costly
Time consuming
Stakeholder impacts (labour market and deregulation)
Targeted ssps needed
Unintended consequences (eg poverty and lower job security due to lower tu)
S side shocks (sras shifts)
W (home and abroad)
Raw materials p
Oil p
Business p (vat)
Import p (spiced wpidec)
Corruption consequences
Inefficient regulation
Lower fdi (acting against initial intentions)
Bribes (extra costs)
Projects/resources given to highest bidder (not most efficient)
Structural u due to
Tech advancements
Loss of ca
Change in consumer preferences
Causes of ca surplus
D side
Boom abroad
Recession home
Weak ex rate
S side
Low relative i, ulcs
High I
Gains in ca so high x
New resource discoveries
Ca surplus -
Increasing (x-m) increases ad etc
X>m increasing d for currency so spiced therefore may revert to deficit
Fa deficit so may buy bad debt
Harm int relations if dodgy method of surplus causing trade wars or retaliation
Reliance on x growth = unbalanced economy
Determinants of c s i x-m general
Level of real disposable y at home/ abroad (increase=larger mpc/mpi increasing c/m increasing ad)
Ir and availability of credit (borrowing/saving and variable rate mortgages)
Consumer and business confidence
Taxes
Indebtedness
Determinants of c specific
Asset p
Determinants of net x specific
Strength of ex rate
Protectionism at home and abroad
Relative inflation rates
Natural resource levels
Determinants of s specific
Range and trustworthiness of financial institutions
Tax incentives eg isas
Age structure of pop
Determinants of I specific
Spare capacity
Level of comp
P of capital
Environmental costs
Deforestation (flooding risk)
Air pollution
Desertification
Soil erosion
Resource depletion
Resource degradation
Reduces biodiversity
U + - eval
+
More workers lower cost and can choose higher productivity
Lower i as workers have lower w bargaining power so lower w costs of production p
Improve ca as lower y lower m
-
Less y so less c so less gdp so less ad
Less tax revenue and more benefits spending
Hysteresis (Reduction of skills - outdated/forgotten)
Lower living standards (poverty crime)
Eval
Rate (at nru unless its very high)
Duration (lt means higher risk of hysteresis)
Type (structural is worst - occupational very hard to change - frictional not bad and cyclical will end as recessions don’t last forever)
Distribution (worst group is youth as will become lt u so hysteresis)
Policies to reduce u
Cyclical u
Expansionary fiscal and monetary policy
Real w u
Reduce wmin tu strength (y inequality and living standards)
Policies to reduce structural unemployment (nru)
Interventionist ssps
More g on education training transport infrastructure
More subsidies for in work training
Grants/low cost housing
Market based ssps
Reduce benefits
Deregulate hiring and firing
Policies to reduce frictional u (nru)
Interventionist ssps
More resources for job centres and private job agencies
More g on infrastructure
Market based ssps
Lower benefits
Contractionary monetary policy + -
+
Lower dp i
Reduce ca deficit
Lower debt
More sustainable borrowing
Flexibility to reduce ir in future
-
Lower growth
Lower I reducing competitiveness
Increase u
More expensive to service debts (no i)
Expansionary fiscal policy + - and eval
+
More growth
Lower u
More lras (health education infrastructure)
Lower y inequality
Laffer curve increasing t due to tax cuts
Crowding in
-
More dp i
Ca deficit
Worsening of gov finances
Crowding out
Xi as no profit motive
Time lags
Income inequality increases
Eval
Size of output gap
Size of multiplier
Consumer and business confidence
State of gov finances
Lr returns to gov
Stage of economic cycle
Laffer curve
Crowding out vs in
Measures of int competitiveness
Ulcs (total labour costs/output)
Global competitiveness index
Tot (increase means worse p comp of g/s)
Policies to increase int competitiveness and -
Ssps
-
Ssps -
Competitiveness is a relative concept
Trade of primary goods for developing countries + -
+
Standard + of trade
-
Resource curse (p may reduce in future, resources deplete)
Very susceptible to p fluctuations (s and d both p inelastic) - reduces stability I and fdi
Prebisch singer hypothesis (lt decline in tot)
Tariff escalation
Why y inequality in developing country
Politicians act in their self interest
Capital flight
Education + -
+
Productivity
Job potential y qol standards of living choice
Gender equality = health and education
Health
Tech
-
Cost
If private sector = excludability
- externalities of bank failure
Systemic risk
Cost to taxpayer of bank bailouts
Loss of individual savings
Loss of jobs y and growth (recession)
Fdi purposes for investing firm
Useful natural resources
Emerging/growing markets
Low cost of labour
Low regulations/standards
Hdi + and -
+
Broad - uses lots of indicators
Focus on developmental outcomes
Allows for progress to be measured over time
Attention focus on countries with low development
Used as standard around the world
-
Does not measure distribution of y (inequality)
Long life expectancy ≠ good qol
Years in school ≠ good teaching
Do not include hidden economy
Other factors (crime corruption poverty)
Similar hdi countries could be v diff
Why y inequality due to economic growth
One sector dominance (uk financial sector)
Capital intensive production
Cities vs rural
Poor quality jobs
Lack of welfare state
Inflation - eval
-
Lower purchasing power so reduced living standards with constant w
Erosion of savings
Reduce x comp if relatively high
W/p spirals
Fiscal drag
Eval
Rate (low and stable)
Cause (dp>cp) - dp=growth and lower unemployment, cp=lower growth and higher u
Duration (lt=bad as more spirals)
Anticipated vs unanticipated
Stability (volatility is bad)
Lender of last resort + -
+
Reduce panic
Increase stability
Prevents bank runs
-
Moral hazard
Banks may not hold sufficient liquidity
Regulatory capture
Types of financial market failure
Speculation and market bubbles (xs risk)
Asymmetric info (moral hazard and adverse selection)
- externalities (xs risk)
Market rigging (collusion)
Policies to increase ad -
-
Conflict of objectives
Size of output gap
Gov finances
Consumer and business confidence needs to be high
Time lags
Lfs + -
+
More accurate than claimant count
Internationally agreed upon measure
-
Expensive to collect data
Sample may not be representative
Disparities unknown
Under employed counted as fully employed
National debt +
Borrowing required for infrastructure
Inevitable when economy experiences severe external shock
Rational to borrow to I when bond yields are low
Can become partially self financing with more t
Countries specialise as
They have fops produce g/s more efficiently and better than other countries
Costs of int trade
Transport
Ex rate
Legal docs
Reqs
Market research
Translations
Tot change in sr
D/s of x/m
Relative inflation rates
Ex rate movements
Why Marshall Lerner condition
D for x-m tends to be inelastic in sr
Healthcare + -
+
Productivity
More jobs (hospitals dentists gps)
Happiness
-
Cost
Excludability
Inequality reduces growth as
Poorest may find it hard to start businesses
No savinfs
Lack of assets for collateral
No assets
Low access to credit
Prebisch singer hypothesis
Manufactured goods are yed elastic
Primary goods are yed inelastic
So in lt p of m increases faster than p of x
Tot changes being good or bad depends on
How causes
Int competitiveness
Q of x and m
Ped of x and m (current account so ad)
Tot change in lr
Prebisch singer hypothesis
Productivity
Tech
How to solve Prebisch singer hypothesis
Use revenue from st swings in primary p to diversify and reduce dependency on primary products
Claimant count + -
+
Data is easy to collect
No cost
-
Can be manipulated by gov to seem smaller
Difficult to compare between countries
Excludes people who don’t claim
Cpi-
Personal inflation rates differ (average family)
P fluctuation of food electric gas (cope cpi)
Housing costs (cpi h)
Basket updates too slow
Specific direct taxes eg
Alcohol duty
Cigarette duty
Sugar tax
Fuel duty
Air passenger duty
Microcredit + -
+
Fills savings gap
Reduces poverty
Low interest rates reduce burden
Empower women
-
Businesses not always successful (how will loan be paid back)
Lenders can still apply high ir and how time frames
Loans not big enough to reduce poverty (spent on c)
Civil wars
More likely in developing countries
Capital flight
Lower fdi
Lower infrastructure
More military spending (even after war ends)
Fixed ex rate + -
+
Reduces uncertainty increasing fdi
Lower trade costs by reducing hedging
More discipline for domestic producers by eliminating fluctuations (only way to increase comp is to improve product - can’t rely on depreciation)
-
Trade offs
Large levels of foreign currency reserves needed
Speculative attacks (not necessarily correct ppp value)
Infrastructure eg
New and improved
Roads/motorways
Railways
Airports/runways
Bridges
Ports
Schools
Hospitals
Water
Electric
Sewage
Telephone
Internet
Flood defence
Liabilities eg
Deposits
St borrowing (inter bank and boe)
Lt borrowing (issuing shares and corporate bonds)
Shareholders funds
Rp
Speculation and market bubbles
Buy low and sell high
Excessively high estimates of future p can create a market bubble and overpaying for assets
Eventually d and p decrease leading to worthless assets and huge debts if leveraged
Everyone selling will exacerbate p falls
Asymmetric info - adverse selection
When the most likely buyers are those the seller would prefer not to sell to due to imperfect info
Eg with health insurance
Market rigging
Where traders/bankers/intermediaries collude to manipulate markets and make high profits
Can occur if punishment and enforcement is weak
Expansionary monetary policy - eval
-
Dp i
Increases ca deficit
Negative impact on savers
Time lags (has to go through transmission mechanism)
Liquidity trap (ir lose effectiveness after hitting a lb)
Eval
Depends on size of output gap
Consumer and business confidence
Banks willingness to lend and pass on full cuts
Size of rate cut
Contractionary fiscal/monetary policy (same) + - eval
+
Reduces dp i
Improves ca deficit
More confidence and improvement of gov finances
Over time can reduce cost of borrowing by reducing coupons as less risky
More flexibility for fiscal policy
Less crowing out and xi
-
D side shocks possible
Low g on education health infrastructure
High t means lower living standards
Laffer curve may mean lower t
Risk of more y inequality of reducing benefits or increasing regressive taxes
Eval
Is it necessary to run a surplus (state of gov finances)
Gov finances could look worse (debt/gdp
Policies used (both lower g and higher t not needed)
Stage of economic cycle
Transmission mechanism
If official bank rates decrease
Lower commercial bank rates
Higher d for housing as lower mortgage costs
More confidence as people think lower rates = more future growth
Depreciated ex rate as hot money outflows increase s
Higher dom and external d increasing total d
Higher dom i
Import i
Increased total i
Appreciation + -
+
Lower dp i and cp i
Cheaper m so better living standards
More efficiency to compete with low cost m
-
Lower growth
Ca deficit due to (x-m)
Higher u in x industries
Higher u in dom industries as they can’t compete with low cost m
Depreciation + -
+
Increase ad
More employment in x industries
-
Cp and dp i
Appreciation/depreciation eval
Extent of rate change
Ped for x and m (Marshall Lerner)
Protectionism
Foreign aid to increase development -
-
Corruption (no guarantee where g is going)
Dependence + aid fatigue
Loan repayments can lead to indebtedness problems
Increase y inequality as more focussed on secondary sector
Aid may only be given to middle income countries of political or economic interest so poorer and less influential countries lose out
Donor countries may influence policies
Why Gov intervene in fx markets
Lower ex rate to increase employment
Lower ex rate to improve ca deficit
Increase ex rate to lower inflation
Maintain fixed ex rate
Stabilise floating ex rate
Floating ex rate + -
+
No need for currency reserves
Freedom for dom monetary policy
Potentially partially correct ca deficit
Low risk of speculative attacks increasing stability as less risk of over or under valuation
-
Volatility (left to s and d)
Autocorrection of deficit unlikely
Low ex value causes m i
Inflation and u conflict
Srpc
If u decreases d for workers increases increases w and costs therefore p and i
u decreasing causes more consumer confidence increasing c … and i
Mnc for country + -
+
Employment and skills
Eps
Comp and lower p
-
Exploit workers by giving low w
Force local firms out of business
Relocate and cause mass u
Withdraw profits to country with low tax rates so original country won’t receive tax revenue
Influence gov policies
Economic integration types
Pta
Fta
Customs union
Common/single market / economic union
Monetary union
Full economic integration
Monetary union + -
+
Non fluctuating ex rate for smaller countries increasing stability
Lower cost for currency exchange
More confidence and I
Currency more stable against speculation
P between countries easier to compare
-
Loss of monetary policy autonomy (ir and qe)
No potential to alter ex rate to increase trade performance (for x based growth)
High cost of currency conversion (reprinting, collecting, menus, databases)
Lack of fiscal union (reckless members destabilise whole union)
Capital flight eg
Fdi with repatriated profits
Foreign workers
Dom rich people sending y elsewhere (high tax or political instability)
I eg
Tech
R and d
Factories
Machines
Software
Vehicles
protectionism + - and eval
+
infant industry protection (allows inefficiencies and industry may never be big enough)
protect against dumping (hard to prove + strict retaliation if false)
protect against structural U (if already losing CA gov is extending inevitable process)
protect product standards and ban certain goods
increase gov rev (not a lot)
improve ca deficit (lower M) - retaliation so no diff
avoid risk of over specialisation
-
market distortion (higher p, lower cs, lower choice)
production inefficiencies (loss of world ae)
retaliation (increases distortion and makes inefficiencies worse)
regressive
eval
size of measures
elasticity of d/s
free trade/globalisation + -
+
Larger market = greater demand leads to higher eos as higher q so more growth so fiscal dividend lower u lower costs and prices - high int comp (more efficiency) means lower costs
For consumers = more choice, more quality, access to goods that cant be produced domestically
Tech transfer means more I and better products
exploit own ca = specialisation gains so higher ae and x leads to ad etc
free movement of capital and labour
Trade creation so cheaper raw mats and cheaper products
trickle down effect
st profits used to diversify
-
more inequality (no trickle down effect)
worker exploitation from mncs
structural u
specialisation = overreliance (greater risk of external shocks+instability - trade imbalances)
environmental costs
withdrawal of profits and labour to home country
trade diversion
high immigration if uncontrolled
diversify=need high skilled labour (from where)
coincidence of wants
Prebisch singer hypothesis
why is high costs bad
opp costs
how will it be funded:
High servicing = opp cost
spending cuts in future (health/education) –> burden poor
future tax rises likely (regressive)
High borrowing = crowding out
ricardian equivalence
if mf is limited is it worth it
G is xi and ai
Eval
Cost of borrowing
Forecast impact of i (real value of debt decrease)
Value judgements about how best to fund future public services
Which generations should bear the costs of doing it
crowding out eval
elasticity of loanable funds (elastic = change in ir is minimal)
qe can increase s to reduce ir (so not inevitable that higher ND means higher general ir)
capital account of bop
debt forgiveness (- as not receiving owed debts)
international death duties
international inheritance taxes
EU membership for uk + - specifics
+
contributions to EU can be low % of gdp
-
forced to follow eu regs (costs and red tape)
could get trade benefits from ftas instead
uk may not benefit from some things money is spent on
UK skilled workers might migrate elsewhere
d side shocks
increase in ir
cut in g
raise t
increase fx rate
stocks (financial)/housing crash
pandemic
output method gdp
final value of all goods/services produced in an economy in a year
income method gdp
adding up all factor incomes in an economy in a year (all w profits interest rent)
expenditure method gdp
adding up all c i g (x-m) in an economy in a year (expenditure on all g/s produced in an economy in a year)
policies to reduce i
contractionary monetary policy more likely (since its central banks job to reduce i) and better suited (more avenues in transmission mechanism so more likely to have an impact)
why gov want to increase int competitiveness
rebalance economy (avenue for future growth in x)
more growth = more jobs y standard of living
QE -
Inflation
Inequality
Fuels speculative bubbles
factors that determine int competitiveness
ulcs (productivity min w)
labour flexibility
labour skills
tax regimes
infrastructure
regulations
economic stability
Fpc
Pra
Fca
