Economics Flashcards

Question

Explain what is meant by a composite demand, with an example?

Answer 1

Composite demand refers to a situation where a good or resource is demanded for multiple uses or purposes, making it challenging to allocate resources effectively between different uses. Eg. Sugar is demanded by both the food industry, and the beverage industry.

Answer 2

• Population: Higher population, moredemand• Incomes: Higher incomes, more demand• Related goods: Price of compliments and substitutes• Advertisements: Increase in brand loyalty, more demand• Tastes: If preferences shift toward product, more demand• Expectation: Speculation on future price changes• Season: Dependent on time of year

Answer 3

The law of demand states that higher prices discourage consumption, leading to a lower quantity demanded, while lower prices incentivize consumption, resulting in a higher quantity demanded.

Answer 4

• Availability of susbsititutes: Lots of substitutes = Elastic demand• Percentage of income spent on good: Large proportion = Elastic, Small proportion = Inelastic• Necessity: Addictive = Highly inelastic

Answer 5

Price elasticity of supply is defined as the responsivess of quantity demanded following a change in price.PED = (Δ%Qd)/(Δ%P)

Answer 6

Total revenue will increase, as the decrease in quantity demanded is proportionately smaller than the increase in price.

Answer 7

Total revenue will decrease, as the decrease in quantity demanded is proportionately larger than the increase in price.

Answer 8

• Elastic: Clothing• Inelastic: Petrol

Answer 9

The quantity of a good or service that suppliers are willing and able to produce at a given price level.

Answer 10

• Productivity: Higher productivity, more supply• Indirect taxes: More taxes = Lower costs of production, more supply• Number of firms in industry: More firms, more supply• Technological advancements: Better technology, more supply• Subsidies: More subsidies, more supply• Weather: (only applicable for agriculture and housing industry). Better weather = more supply• Costs of production: Lower costs of production = more supply

Answer 11

Joint supply refers to a situation in which the production of one good results in the simultaneous production or availability of another good as a byproduct

Answer 12

The law of supply states that higher prices encourage production, leading to a higher quantity supplied, while lower prices disincentivize production, resulting in a lower quantity supplied.

Answer 13

Price elasticity of supply is defined as the responsivess of quantity supplied following a change in price.PED = (Δ%Qs)/(Δ%P)

Answer 14

• Availability of resources: Greater availability, more elastic• Production time lag: Low time lag, more elastic• Mobility of factors of production: More mobile factors, more elastic

Answer 15

Supply price is inelastic in the short run due to limited production capacity and constraints in adjusting inputs promptly.

Answer 16

• Elastic: Sports car• Inelastic: Housing in UK

Answer 17

The responsiveness of demand to a change in income.YED = (Δ%Qd)/(Δ%Y)

Answer 18

A normal good is a good whose demand increases as incomes rise. This means their YED = +/+ = Positive.

Answer 19

A good which is not essential for survival, such as a sports car, and its YED > 1.

Answer 20

Off-brand food products.

Answer 21

An inferior good is a good whose demand falls as incomes rise. This means their YED = -/+ = Negative.

Answer 22

The responsiveness in the quantity demanded of good A following a change in price of good BXED = (Δ%Qd(A))/(Δ%P(B))

Answer 23

Substitutes - a rise in price of good A leads to an increase in demand for good B)

Answer 24

Complements - a rise in price of good A leads to a decrease in demand for good B)

Answer 25

Describes the unseen forces of self-interest that impact the free market for the most optimal level of resource allocation.

Answer 26

1. Signals to producers that prices are too high/low22. Incentivises producers to increase/decrease prices3. Rations excess supply and demand4. Allocation of scarce resources

Answer 27

1. Excess queueing, waiting lists and competition between buyers to purchase good (Signal is sent to producers that prices are too low)2. Higher price and make more revenue and profit (Incentive sent to producers)3. Extension in supply, contraction in demand - market has re-established equilibrium (Excess demand is rationed away)4. Resources reallocated at the free-market equilibrium, where there is no excess supply or demand.

Answer 28

1. Excess unsold stocks on shelves (Signal is sent to producers that prices are too high)2. Lower price and make more revenue and profit (Incentive sent to producers)3. Contraction in supply, extension in demand - market has re-established equilibrium (Excess supply is rationed between consumers)4. Resources reallocated at the free-market equilibrium, where there is no excess supply or demand.

Answer 29

The difference between the price that consumers are willing and able to pay, and the price they actually pay.

Answer 30

The difference between the price at which producers are willing and able to sell a good or service and the price they actually receive.

Answer 31

Partial market failure occurs when the forces of supply and demand fail to efficicently allocate resources, while complete market failure refers to the total absence of goods or services provision by markets.

Answer 32

An externality occurs when the production or consumption of a good or service has unintended consequences on a third party for which no compensation or payment is made in the market

Answer 33

External costs (MEC) are negative consequences or expenses imposed on society due to an economic activity, with the responsible party not bearing the full cost. External benefits (MEB) are positive effects or advantages experienced by others or society from an economic activity, with the responsible party not providing the full benefit.

Answer 34

Private costs (MPC) are the expenses that a person or firm pays in order to buy, or produce goods and servicesPrivate benefits (MPB) are the benefit derived by an individual or firm directly involved in a transaction as either buyer or seller

Answer 35

Social costs (MSC) refer to the total expenses or negative consequences borne by society as a whole due to an economic activity, including both private costs and external costs. MSC = MPC + MEC.Social benefits (MSB) are the overall advantages or positive outcomes received by society as a whole from an economic activity. MSB = MPB + MEB.

Answer 36

To ensure that the costs or benefits associated with an economic activity are accounted for by the parties involved in the transaction, rather than being externalized towards society.

Answer 37

Merit goods are goods or services that provide positive externalities of consumption (external benefits to society, leading to social welfare gain), and are often underprovided by the free-market, such as the National Health Service (NHS) in the UK, which provides essential healthcare services to the population.

Answer 38

Demerit goods are goods or services that provide negative externalities of consumption (external costs to society, leading to social welfare loss), and are typically overprovided by the market, such as alcohol, which can lead to health issues, addiction, and social problems.

Answer 39

The free-market does not consider the full social costs or benefits of merit and demerit goods. Positive externalities of merit goods are underproduced due to undervaluation, while negative externalities of demerit goods result in overproduction. Government intervention is necessary to align market outcomes with the socially optimal level of output.

Answer 40

The triangle of net social welfare loss represents the inefficiency and loss of overall societal welfare when the quantity of a good or service produced and consumed deviates from the socially optimal level due to externalities.

Answer 41

The social optimum level of output, where MSC = MSB.

Answer 42

A public good is a good or service that is non-excludable and non-rivalrous, meaning that its use by one individual does not diminish its availability to others. An example of a public good is street lighting, as it benefits the entire community and cannot be easily restricted or used up by one person's consumption.

Answer 43

A good or service that possesses characteristics of both public and private goods, exhibiting partial rivalry or partial excludability.

Answer 44

Where individuals benefit from a public good without contributing to its production or funding, taking advantage of the fact that the consumption of the good cannot be restricted.

Answer 45

Where one, or both parties of a transaction possesses incomplete, inaccurate, or asymmetric information, leading to suboptimal decision-making and market inefficiencies.

Answer 46

Where one party in an economic transaction has more information or knowledge than the other party, creating an imbalance in the information available.

Answer 47

Government intervention refers to the actions taken by the government to regulate economic activities in order to correct market failures

Answer 48

A tax levied on spending rather than directly on income, profit or commission, typically imposed at the point of production, sale, or consumption

Answer 49

An Ad valorem tax is a tax levied as a percentage of the price of the good or service, while excise duty is a set amount of tax imposed on goods and services.

Answer 50

Tax imposed as a percentage of the product's price increases the cost of production for suppliers, leading to a higher price required for suppliers to be willing to produce the same quantity, resulting in a diverging shift of the supply curve.

Answer 51

• Generates fiscal dividends for the government which can be reinvested into public infrastructure and development• Market failure corrected as the external cost of negative externalities is internalised• Behaviour changes can be made if indirect taxes are imposed, discourage consumption of demerit goods.

Answer 52

• Regressive impact on those on lower incomes• May encourage black-market activity• Can cause cost-push inflation

Answer 53

They tend to impose a proportionately higher burden on lower-income individuals or households compared to higher-income individuals, as the tax burden represents a larger share of their income.

Answer 54

Top rectangle represents incidence of indirext taxation on consumers. If demand is inelastic, burden of tax will fall mainly on consumers.Bottom rectangle represents incidence of indirext taxation on producers. If demand is elastic, burden of tax will fall mainly on producers.

Answer 55

• Magnitude of the tax (hard to determine)• Price elasticity of demand/supply• Workers may lose their jobs, firms may shut down or migrate to a different nation• Consumers may switch to untaxed substitutes• Black markets can reduce the total tax revenue

Answer 56

A government grant to firms producing merit goods, which aims to reduce production costs and encourages an increase in output.

Answer 57

• Market failure corrected, level of production increased to match social optimum.• Can incentivise research and development• Has the potential to create job opportunities

Answer 58

• Can pose as a budgetary burden on the government• Firms may become overly dependent on the subsidy• Can discourage innovation and efficiency

Answer 59

Top rectangle represents benefit of subsidy on producers. If demand is inelastic, benefit of subsidy will fall mainly on consumers.Bottom rectangle represents benefits of subsidy on consumers. If demand is elastic, benefit of subsidy will fall mainly on producers.

Answer 60

• Magnitude of the subsidy (hard to determine)• Price elasticity of demand/supply• Opportunity cost - can the money be better used elsewhere• Dependence/reliance on subsidy• Producers may not pass down the benefit of the subsidy

Answer 61

Tradable pollution permits are market-based instruments that set a limit on pollution and allow entities to buy, sell, or trade permits, incentivising pollution reduction and the efficient allocation of emissions.

Answer 62

• Government gains revenue from selling permits and fining firms who exceed their pollution quotas• Incentivises investment into greener technology (economic sustainability)• Guaranteed that pollution will fall because supply of limits is perfectly inelastic

Answer 63

• Can be costly to monitor (government failure if costs are greater than benefits)• Difficult to determine how many tradable permits should be sold• Raises costs for firms, causing higher prices for consumers

Answer 64

• Protects markets from externalities • Maximum prices can protect consumers from price exploitation by ensuring that essential goods remain affordable• Minimum prices ensure that producers receive a fair return on their investments• Reduced market price volatility

Answer 65

• Distortion to price signals and causes excess supply or excess demand• Difficult to determine where to set prices• Can lead to the creation of black markets

Answer 66

• Consumer protection from exploitation and fraud• Regulation policy prevents monopolistic competition• Can achieve public interest and social objectives by addressing externalitise and other sources of market failure

Answer 67

* Monitoring firms for the compliance of passed regulation and laws can be costly - fiscal opportunity cost * Excessive regulation can reduce competition and allocative efficiency in markets by increasing bureaucracy and reducing innovation * Costs may be passed onto consumers in the form of higher prices

Answer 68

• Market failures such as non-excludability and non-rivalry corrected as the free-market is not willing to provide public goods• Reduces inequality and improves standards of living• Ensures the stability and security of a nation (ie. nuclear defense system)

Answer 69

• Free-rider problem• Potential inefficiencies may arise as there is a lack of innovation and competition• Risk of monopoly power

Answer 70

• Helps consumers act more rationally, causing market to work in favour society• Improved decision-making in markets• Can incentivise firms to produce, stimulating growth• Public health and safety (ie. effects of smoking)• Empowerment of consumers as there is less information asymmetry between parties

Answer 71

• Can be costly to enforce information provision• The government may not possess perfect information themselves• Consumers may behave irrationally, or follow behavioural and cultural biases instead

Answer 72

When the costs of government intervention outweigh the benefits intended by the action, can lead to a misallocation of scarce resources.

Answer 73

Government bureaucracy refers to the administrative officials within a government that are responsible for implementing policies, regulations, and public services.

Answer 74

Regulatory capture refers to a form of political corruption in which regulatory agencies, tasked with protecting public interest, become influenced or controlled by the industries or entities they are supposed to regulate, leading to biased or ineffective regulation.

Answer 75

1. Imperfect information2. Red tape effect3. Costs of regulating and monitoring4. Costs of administrating5. Regulatory capture6. Time lags from time of intervention to time of effect

Answer 76

1. Minimum wage laws intended to improve workers' welfare may lead to job losses and reduced employment opportunities, particularly for low-skilled workers.2. Price controls imposed to make goods more affordable can result in shortages and black markets as suppliers are disincentivized to produce and distribute the goods at artificially low prices.3. Agricultural subsidies aimed at supporting farmers and ensuring food security may distort market incentives, leading to overproduction, environmental harm, and inefficient allocation of resources.

Answer 77

Sum of the total value of all goods and services produced within an economy during one year. GDP = C + I + G + (X-M)

Answer 78

GDP does not consider several key factors such as:• Where the wealth is stored, ie. income inequality• Environmental sustainability• Access to, and the provision of public/merit goods such as healthcare• Economic and price stability• Availability of credit, education opportunities and basic necessities (such as water, food and energy)

Answer 79

The total income earned by a country's residents, including both domestic, and international sources

Answer 80

GDP per capita, or Gross National Happiness (GNH)

Answer 81

A comparison of the relative purchasing power of different currencies by equalizing the prices of a basket of goods and services across countries

Answer 82

Used for accurate international comparison of living standards and economic indicators like GDP between countries with different currencies, and price levels.

Answer 83

1. Households: Pay firms for goods and services.2. Firms: Pay households for human capital/labour.3. Governments: Collect tax revenue from both households and firms; Pay firms to buy goods and services; Pay welfare benefits to households.4. Financial Sector: Collect savings, Pay withdrawals5. Other Nations: Collect imports, Pay for exports.

Answer 84

Withdrawals:• Savings• Imports• TaxationInjections:• Withdrawals• Exports• Government spending

Answer 85

Depicts fluctuations in economic activity over time, involving periods of boom (positive output gap) and recession (negative output gap).Trend rate of GDP growth (on the PPF) is the economy's productive potential.Actual rate of GDP growth is the economy's current position in terms of economic activity.

Answer 86

• Technological advancements and innovation.• Investment in physical and human capital.• Improvements in education and skilled workforce.• Access to financial resources and credit• Infrastructure development• Research and development

Answer 87

* Lower levels of unemployment * Higher nominal incomes --> Higher standards of living * Greater fiscal dividends (tax revenue) for the Government to reinvest back into providing higher quality public services * Attractive to foreign investors looking to start-up in the UK * More production in the economy --> More exports, leads to higher competitiveness in the global trade market

Answer 88

• High likelihood of demand-pull inflation• Environmental degradation and resource depletion• Increased carbon emissions leading to climate change• Mental health and social issues - workers forced to work longer hours than they would like• Economic instability

Answer 89

• Disposable income: Higher levels of income generally lead to increased consumption.• Consumer confidence• Interest rates: Lower interest rates can incentivize borrowing and increase consumption.• Availability of credit: Easy access to credit can facilitate higher levels of consumption.• Wealth and asset prices: Rising asset prices, such as housing or stock market values, can boost consumer spending.

Answer 90

• Unemployment rates and level of price stability• Value of consumer assets and house prices• Standards of living• Average incomes• Consumer expectations (anticipations of future economic growth and/or job opportunities)

Answer 91

MPC is calculated as the change in consumption divided by the change in disposable income.

Answer 92

When an initial injection of money into the economy leads to a proportionately larger final increase in AD.

Answer 93

A psychological phenomenon stating that when asset values rise, this makes individuals feel wealthier, leading to increased spending and a boost in overall consumption and economic activity

Answer 94

• Availability of credit and financing• Business confidence• Level of economic growth• Interest rates• Value of privately owned assets• Foreign demand for exports• Technological advancements

Answer 95

• Availability of credit and financing• Unemployment rates and level of price stability• Level of economic growth• Interest rates• Competition within markets and market demand• Availability of commodities/resources

Answer 96

When changes in investment spending have a magnified impact on the level of economic output

Answer 97

Keynesian ideology stating that psychological factors driving economic behavior and decision-making. Factors such as confidence, optimism, risk-taking, and herd mentality can influence individuals and businesses in their economic choices.

Answer 98

MPS + MPT + MPM

Answer 99

1 / 1-MPC = 1/MPW

Answer 100

A credit crunch is a sudden reduction in credit availability, leading to restricted borrowing and higher borrowing costs.

Answer 101

• A financial crisis• Banking system instability• Excessive lending and borrowing• A decline in asset values• Loss of confidence in the economy

Answer 102

Individuals who are either employed or actively seeking employment, indicating their participation in the labor market and their willingness and ability to work

Answer 103

Proportion of economically active individuals within an economy who are willing and able to work but can not find a job.

Answer 104

Unemployment resulting from fluctuations in the business cycle and economic downturns.

Answer 105

Unemployment resulting from the time taken for individuals to switch jobs or find new employment.

Answer 106

Unemployment arising from reduced or eliminated jobs and skills mismatch in the labor market.

Answer 107

Unemployment that occurs due to predictable, temporary fluctuations in demand for labor during certain seasons or specific times of the year, such as agricultural or tourism-related industries.

Answer 108

Unemployment caused by wages being set above the equilibrium level, resulting in a surplus of labor, as employers are unwilling or unable to hire workers at the prevailing wage rate.

Answer 109

Hysteresis occurs when a temporary shock or disturbance to an economy leads to lasting or permanent changes in variables such as employment, output, or productivity, preventing a return to the previous state.

Answer 110

Economically active individuals are those who are either employed or actively seeking employment, employed have a job or are engaged in work, regardless of their level of economic activity.

Answer 111

• Claimant count data is often available on a monthly basis, providing more timely information about the state of unemployment compared to other measures.• Relies on existing administrative records, making it a relatively cost-effective and efficient way to estimate unemployment rates• Provides a consistent measure over time, allowing for meaningful comparisons and analysis of trends in unemployment.

Answer 112

• Excludes individuals who are unemployed but not eligible for, or not claiming benefits• Some individuals may choose not to claim benefits due to the stigma associated with unemployment or personal reasons• Includes individuals who voluntarily leave their jobs, making it difficult to differentiate between voluntary and involuntary unemployment

Answer 113

• Captures a wide range of demographic and labor market information, providing a comprehensive view of the workforce beyond just those eligible for unemployment benefits.• Uses rigorous sampling techniques to ensure the data represents diverse groups and regions accurately• Collects detailed data on employment status, occupation, industry, and hours worked• Regularly conducted, the LFS enables tracking of trends over time, providing valuable insights into changes in employment rates, workforce participation, and unemployment dynamics

Answer 114

• Sample may not fully represent the entire population, leading to potential inaccuracies, especially for smaller subgroups or localized areas• Voluntary responses in the LFS can introduce response bias, because certain individuals may be more or less likely to participate• LFS is conducted less frequently than administrative data sources, limiting the timeliness of the information provided

Answer 115

Underemployment refers to workers who are employed in jobs that do not fully utilize their skills, or work desired working hours. This reduces productivity, dampens economic growth, and leads to wasted human capital, resulting in lower income levels, decreased consumer spending, and overall economic inefficiency.

Answer 116

High unemployment rates can result in financial stress, reduced well-being, career setbacks, social isolation, and negative health consequences for individuals.

Answer 117

High unemployment rates can lead to reduced consumer spending, lower production and output, decreased business investment and increased market competitiveness, so wages decrease.

Answer 118

High unemployment rates increase government spending on social welfare programs while reducing tax revenue, causing a fiscal deficit to become worsened.

Answer 119

High unemployment has the potential to improve the net trade balance. Low levels of productive output, leading to less net exports, leading to a worsening of the net trade balance.It can also be argued that high unemployment rates can contribute to a decrease in imported goods due to reduced domestic demand, resulting in an improvement in the trade balance.

Answer 120

The sustained rise in general price level over a given time period.

Answer 121

A newer measure of inflation, monitors the change in the price level within an economy for a basket of goods purchased by households which is used to monitor inflation.

Answer 122

(Index / Base Year) * 100The base year is always set at an index value of 100.

Answer 123

Advantage of CPI: Comprehensive measure of inflation tracking changes in prices of goods and services.Disadvantage of CPI: May not fully reflect inflation experienced by specific demographic groups with different consumption patterns.

Answer 124

An older measure of inflation, less commonly used than CPI, although works on the same basis of monitoring the value of a basket of goods.

Answer 125

Advantage of RPI: Broader inclusion of housing-related costs such as mortage repayments and council tax.Disadvantage of RPI: Tends to yield higher inflation figures, potentially overstating true inflation rate.

Answer 126

1. Calculating method2. Weighting method3. Coverage of housing costs (CPI includes housing costs, whereas RPI tracks mortgage repayments and council tax)

Answer 127

A measure of average price level changes in an economy for goods and services that includes housing costs for homeowners, used to track inflation and cost of living.

Answer 128

Advantage of CPIH: Includes housing costs, providing a more comprehensive measure of inflation that reflects the impact on households.Disadvantage of CPIH: Relies on certain assumptions and imputations for estimating owner-occupier housing costs, which may introduce potential inaccuracies in measurement.

Answer 129

A selected set of goods and services that most accurately depict the spending habits of an economy, which are used to calculate price indexes.

Answer 130

Weighted based on their share of total consumer expenditure, which are typically determined using data from surveys or expenditure data. The more frequently and extensively a good or service is purchased, the higher its weight in the basket of goods.

Answer 131

Goods and services are weighted in the basket to reflect their importance in consumer spending patterns, and provide a more accurate measure of inflation and costs of living.

Answer 132

An increase in cost of production or a decrease in the availability of resources leading to an inward shift of supply causing higher prices.

Answer 133

When the level of aggregate demand within an economy rises and beyond the productive potential output (supply remains constant) resulting in higher prices of goods and services.

Answer 134

The increased time and effort spent by individuals and businesses in response to inflation, such as more frequent trips to the bank to withdraw cash, in order to minimize the loss of purchasing power.

Answer 135

Menu costs are the expenses and inconveniences that businesses face when changing their prices due to inflation.

Answer 136

Cost push inflation is derived from an increase in production costs (ie. from a supply shock), whereas demand-pull inflation is derived from excess demand within an economy forcing producers to drive up prices.

Answer 137

When higher wages lead to higher price levels throughout the economy, resulting in workers demanding for even higher wages, creating an inflationary cycle.

Answer 138

• Reduced purchasing power: High inflation diminishes the value of money, reducing individuals' ability to buy goods and services.• Reduced savings and investment: Inflation erodes the value of savings, discouraging saving and reducing funds available for investment.• Increased production costs: Businesses face higher production costs due to rising wages and input prices, potentially squeezing profit margins.• Income redistribution: Inflation affects different income groups unevenly, widening income disparities.• Macroeconomic instability: High inflation decreases economic confidence and can lead to currency depreciation

Answer 139

High inflation rates increase production costs, creating uncertainty in planning and pricing decisions, and potentially reducing investment and growth opportunities.

Answer 140

Deflation is a sustained decrease in the general price level of goods and services. It can lead to a negative wealth effect and worsened confidence within the economy.Deflation can:• Reduce consumer spending and hinder economic growth• Increased debt burdens, ,• create a cycle of falling prices causing businesses to cut production, investment, and employment, (exacerbating the economic downturn)

Answer 141

High inflation rates reduce individuals' purchasing power, erode real wages, create financial uncertainty, distort economic decision-making, and can widen income disparities.

Answer 142

High inflation rates impact the government by reducing the purchasing power of government spending, and makes it more costly to borrow money, potentially worsening national debt in the long run.

Answer 143

High inflation rates can potentially decrease imports and improve the trade balance as the reduced purchasing power of domestic currency makes imported goods relatively more expensive.

Answer 144

Policies that aim to reduce unemployment can potentially lead to higher demand-pull inflation, and policies targeting inflation reduction may result in increased unemployment.

Answer 145

The Phillips curve depicts the inverse relationship between unemployment and inflation (in the short run). As unemployment decreases, inflation tends to increase, and vice versa, implying a trade-off between the two variables.

Answer 146

Long-run inconsistency due to factors like inflation expectations, changes in economic structure, and supply-side shocks; the presence of unstable policy trade-offs between unemployment and inflation; the influence of structural changes in the economy such as technological advancements

Answer 147

Stagflation refers to a situation of stagnant economic growth coupled with high inflation, which can be caused by supply-side shocks or a combination of factors such as rising energy prices, declining productivity, or government policies.

Answer 148

1. Trade of goods / visibles (X-M)2. Trade of services / invisibles (X-M)3. Primary income: Wages, profits and commissions earnt from abroad.4. Secondary income: Money transfer payments sent abroad.

Answer 149

High relative inflation rates reduce global economic competitiveness by eroding the price competitiveness of domestic goods and services, leading to a decline in exports, reduced market share, and potential negative impacts on employment, economic growth, and trade balance.

Answer 150

• A weak relative currency can reduce the price of exports, leading to greater export demand.• Individuals moving 'hot money' over in the form of transfer payments (ie. remittance) because of higher differential interest rates.• Lower incomes can lead to lower import demand

Answer 151

• Improved current account balance:• Increased foreign currency reserves as money is injected into the economy• Boost to domestic industries and employment• Potential currency appreciation: A trade surplus can lead to an increase in demand for the country's currency, potentially resulting in currency appreciation

Answer 152

• Strong relative currency can increase the demand for imports, while decreasing the demand for exports• Hot money flowing into other economies due to higher reward for saving elsewhere can cause a deficit in secondary income flow• Borrowing and interest payments: An excessive amount of external debt to foreign creditors can lead to an outflow of money from the economy• Dependence on imported raw materials and resources causes a constant outlflow of money from the economy

Answer 153

• Increased foreign debt as financing may be conducted from foreign creditors• Hindrance of economic growth (lack of domestic competition between firms)• Dependence on foreign production• Potential currency depreciation as demand for domestic currency decreases

Answer 154

SPICED. Strong Pound Imports Cheap Exports Dear.Net trade balance worsens as import demand rises and export demand falls.

Answer 155

WPIDEC. Weak Pound Imports Dear Exports Cheap.Net trade balance improves as import demand falls and export demand rises.

Answer 156

Shows that a depreciation of the currency will cause a short-term deterioration of the net trade balance followed by a subsequent improvement.

Answer 157

• Assumes that the price elasticity of demand for exports and imports remains constant over time• Does not consider other factors that can influence the trade balance, such as non-price competitiveness, productivity, and changes in domestic and foreign economic conditions• The time frame for the adjustment depicted by the J-curve can vary, and the actual magnitude and duration of the impact may differ in different situations

Answer 158

A depreciation of a currency's value will typically cause a deterioration of the trade balance, but will lead to an improvement in the trade balance as exports become relatively cheaper and imports become relatively more expensive - as long as the Marshall-Lerner condition is met.

Answer 159

A devaluation in the value of a currency leads to a temporary worsening of the trade balance, but causes an improvement in the long-term net trade balance only if the sum of the price elasticity of demands of exports + imports is greater than 1.

Answer 160

• Costlier imports: A devalued currency makes imports more expensive, which can negatively impact the current account balance.• External debt burden: Devaluation can increase the cost of servicing foreign currency-denominated debt, putting pressure on the current account balance.• Time lag in export benefits: While a devaluation can enhance export competitiveness, it takes time for export volumes to increase and offset higher import costs, initially worsening the current account balance.

Answer 161

The economy will always return to the long-run productive potential level of output despite any temporary shifts made to AD or SRAS. A shift in AD does not have the power to cause economic growth in the long run.An increase in AD will cause demand-pull inflationary pressures, causing costs of production to rise, hence SRAS shifts back to meet the LRAS equilibrium point of output, along with increased price levels.

Answer 162

Government intervention through the use of demand-side policies is most effective at stimulating economic activities and mitigating the likelihood of a recession.

Answer 163

Friedrich Hayek believed in free-market capitalism, limited government intervention, and the importance of individual liberty and personal responsibility in driving economic and societal progress.

Answer 164

Fiscal policy is a demand-side policy which refers to the use of government spending and taxation to influence the overall state of the economy, stimulate economic growth and reduce unemployment

Answer 165

The Government can choose to finance the fiscal deficit through borrowing or other means to maintain spending levels.

Answer 166

• Direct Taxation: Income tax, Corporation tax, Capital gains tax etc. • Indirect Taxation: VAT, Excise Duty• Borrowing: Issuance of bonds allows them to finance public projects or budget deficits, however it can add to the overall debt burden• Fees/Fines: Typically for failing to follow Government rules and regulations

Answer 167

Social protection (welfare benefits etc.), Healthcare, Education, Public services, Infrastructure.

Answer 168

A form of contractionary fiscal policy taken by the government to reduce public spending and/or increase income taxe rates in order to address budget deficits and control national debt.

Answer 169

Automatic fiscal stabilisers work by reducing the magnitude of output gaps within an economy.When an economy is in a positive output gap, or a boom, individuals are pushed into higher tax bands, meanwhile Government spending on welfare benefits is reduced, hence AD shifts inwards.When an economy is in a negative output gap, or a recession, individuals are pushed into lower tax bands, increasing consumption, meanwhile Government spending on welfare benefits is increased, hence AD shifts outwards.

Answer 170

• Inflationary pressures, as excessive government spending can fuel demand and lead to rising prices.• Reduced fiscal flexibility, and worse access to credit, limiting ability to respond to future economic challenges.• Increased government borrowing and accumulation of national debt..• Corrective measures such as tax increases or spending cuts can have adverse effects on economic growth / society as a whole.

Answer 171

• Reduced public investment• Inefficient allocation of resources leading to Government failure (collection of more revenue than needed)• Adverse effects on economic growth• Potential opportunity costs on where the revenue could have been spent

Answer 172

• Increase tax rates (both direct and indirect)• Cut government spending• Stimulate economic growth to collect more tax revenue• Implement austerity measures (eg. reductions in social welfare benefits, minimum wage freezes etc.)

Answer 173

• Governments might have imperfect information about the economy. It could lead to inefficient spending. • There is a significant time lag involved with employing the fiscal policy. It could take months or years to have an effect. • If interest rates are high, fiscal policy might not be effective for increasing demand.• If the government spends too much, there could be difficulties paying back the debt, which could make it difficult to borrow in the future.

Answer 174

• Depends on the Marginal Propensity to Consume.• Depends on the size of the multiplier• Depends on the position on the Laffer Curve (although this is impossible to empirically find out)• Depends on the state of the economy

Answer 175

The Laffer curve depicts the relationship between tax rates and tax revenue, illustrating that at a certain point, increasing tax rates beyond a certain threshold may lead to a decrease in tax revenue.

Answer 176

The analysis of the Laffer curve is limited by the difficulty of precisely determining an economy's position on the curve and by relying on simplistic assumptions.

Answer 177

• Reduced incentive to work if tax rates are too high, leading to high unemployment rates and therefore less tax revenue• Reduced incentive to investment if tax rates are too high, leading to lower economic activity• People may move to nations with lower tax rates if they feel the burden of income tax is excessive

Answer 178

Monetary policy refers to the regulation of the money supply through adjustments to basal interest rates. It's primary function is to stimulate aggregate demand, and maintain price stability (2% CPI).

Answer 179

The cost of borrowing money & The reward for saving

Answer 180

Basal interest rates refer to the benchmark interest rates set by the Bank of England, which serve as the foundation for determining other interest rates in the economy.

Answer 181

The Monetary Policy Committee (MPC) within the Bank of England (BoE) is responsible for setting basal interest rates, and performing quantitative easing/tightening after a thorough analysis of the performance of the UK economy.The UK Government is responsible for setting the Bank of England an inflation target for price stability, set at 2% CPI.

Answer 182

1. Basal interest rates decrease2. Lower reward for saving, Lower cost of borrowing3. Reduces the incentive to save, increases the incentive to borrow/invest4. Increases consumption and investment --> Increase in AD

Answer 183

High interest rates can attract foreign investors seeking higher returns, increasing the demand for the domestic currency and potentially causing it to appreciate in value against other currencies.

Answer 184

High interest rates can lead to an appreciation of the domestic currency, making exports relatively more expensive and imports relatively cheaper, which can result in a deterioration of the trade balance

Answer 185

Hot money refers to short-term, speculative capital that is quickly moved between countries or financial markets in search of higher returns or to exploit interest rate differentials.

Answer 186

1. BoE artificially generates money electronically2. BoE uses this money to buy Government bonds from financial institutions (ie. commerical banks)3. Higher demand for bonds causes their value to appreciate, leading to lower long-term yields4. Financial institutions loan money out or invest in riskier corporate bonds5. Price of corporate bonds increases, and their long-term yield decreases6. Access to credit improves, general i.r falls7. Incentivises borrowing, consumption and investment rise leading to greater AD. QE is used if inflation rates are below price stability targets.

Answer 187

March 2009 in response to the Global Financial Crisis, basal interest rates were already very low, but to stimulate economic activity QE was implemented alongside standard issue monetary policy.

Answer 188

Quantitative tightening refers to the process of reducing the size of a central bank's balance effectively decreasing the money supply and tightening monetary conditions in the economy.QT is used if inflation rates are above price stability targets.

Answer 189

• Time lag for any effect on the economy • Liquidity trap - can only lower the cash rate so much • Banks don't always pass on full interest rate changes (profit)• Can't deal with supply-side constraints.• Can be in conflict with fiscal policy

Answer 190

A liquidity trap is a situation where monetary policy loses its effectiveness because interest rates are already very low (possible even 0), and people and businesses hoard cash instead of spending or investing it.

Answer 191

A liquidity trap may occur within an economy when there is a significant decline in consumer and business confidence, leading to increased saving and reduced investment, despite low interest rates. Additionally, it can be triggered by deflationary pressures and a lack of available profitable investment opportunities.

Answer 192

People have fixed-rate contracts such as mortgages, meaning it takes time for changes in policy to impact borrowing, spending, and economic activity in the economy.

Answer 193

• Depends on the Marginal Propensity to Consume (MPC)• Depends on the state of the economic cycle (output gap)• Depends on business and consumer confidence• Depends on the presence of supply-side constraints in the economy

Answer 194

Supply-side policies aim to stimulate economic growth and improve productivity by reducing barriers to production and promoting market efficiency in an attempt to increase the long-run productive potential of an economy.

Answer 195

Supply-side policies focused on promoting economic growth such as reducing taxes and deregulating industries can increase the long-run productive potential for an economy (increase in LRAS) without sacrificing price stability.

Answer 196

Market-based supply-side policies aim to create favorable conditions for markets to operate efficiently, meanwhile interventionist supply-side policies involve direct government intervention to correct market failure

Answer 197

• Spending on education and training• Spending on infrastructure• Subsidies to promote investment and entrepreneurship• Subsidies for research and development• Subsidies to smaller firms

Answer 198

• Reduction of income and corporation tax rates: Incentivise work, investment, and business activity• Privatisation: By reducing government involvement and allowing private ownership, privatisation aims to increase market competition and efficiency in the allocation of resources.• Deregulation: Removing unnecessary regulations and bureaucratic burdens to enhance market efficiency and promote competition.• Reduce minimum wages and welfare benefits• Trade liberalisation: Reducing trade barriers to expand market access and promote international competitiveness

Answer 199

• No guarantee of sucess• Cost of implementation• Time lags• Supply side policies need to be targeted at specific areas• Effectiveness highly depends on consumer and business confidence throughout an economy

Answer 200

1. Experience economies of scale (cost cuts)2. Generate greater revenue and supernormal profits which can be used to re-invest into research and development3. Gain larger market share increasing their influence on prices and contestability, can lead to monopoly power4. Have more security by raising reserve cash in case of financial difficulties and diversifying risk by selling larger range of goods in more countries

Answer 201

1. Market is small or is specialised and niche2. Limited access to finance, low revenue or credit crunch3. The owner may prefer to keep the business small to keep full control of the firm (P.A problem)4. Regulation may prevent large businesses from growing to allow competition to flourish 'Competition Law'

Answer 202

As firms growth there is a seperation of ownership and control because firms are owned by their shareholders and seniors managers are hired to manage operations.

Answer 203

Divorce of ownership and control in firms leads to owners (Principle) hiring managers (Agent). Managers may prioritise personal gain over business interests, creating conflicts due to differing objectives, leading firms to profit satisfice rather than maximise.

Answer 204

The private sector is part of the economy that is owned and run by individuals or groups, usually with the aim of making a profit - includes sole traders, PLCs, LTDs etc.The public sector is part of the economy that is owned and controlled by the government. The purpose of public sector firms is to provide a service for citizens, not to make a profit.

Answer 205

Maximise social welfare and help individuals

Answer 206

When a firm grows by increasing their total level of output.

Answer 207

1. Opening new stores2. Product diversification (R&D)3. Investing in new technology

Answer 208

+Cheap relative to integration+Firm keeps control

Answer 209

-Takes a long time-Difficult to gain new ideas-Difficult to expand into new markets

Answer 210

When a business grows through amalgamation, takeover or merger.

Answer 211

1. Vertical Integration2. Horizontal Integration3. Conglomerate Integration

Answer 212

Firms in the same industry at the same stage of production integrate.

Answer 213

+Reduces competition as a firm is taken out+Increases market share, so the firm has more power to influence markets and set prices+Business grows in a market where it has expertise+Economies of scale

Answer 214

-Increases risk for the business in case that market fails 'Placed all their eggs in one basket'-Some admin staff will be made redundant as they will be duplicated

Answer 215

When a firm integrates with another firm in the same industry at a stage of production closer to the consumer/final good.

Answer 216

+Increased potential for profit as firm takes the potential profit from a larger chain of production+Improved coordination, communication and control over supply chain

Answer 217

-High initial investment costs-Reduced flexibility in responding to changing market-Firms may lack expertise in the new sector

Answer 218

When a firm integrates with another firm in the same industry at a stage of production further from the consumer/final good.

Answer 219

+Ensure deliveries are reliable and control quality, reduces risk+Can restrict access to resources to competitors

Answer 220

-High initial investment costs-Reduced flexibility in responding to changing market-Firms may lack expertise in the new sector

Answer 221

Where firms in dfferent industries with no obvious connections integrate.

Answer 222

+Risk diversification (risk-bearing economies of scale)+Useful where there is no room for growth in current market

Answer 223

-Risky as the firm has no expertise in the new industry-Lack of synergies between diverse business units leading to inefficiencies-High initial investment costs

Answer 224

A business arrangement in which two or more firms agree to pool their resources for the purpose of accomplishing a specific task

Answer 225

When a single large firms is broken into multiple smaller firms, each to operate on their own, sold or dissolved.

Answer 226

1. Lack of synergies2. Value of seperate parts of the company worth more than company combined3. Prevent diseconomies of scale4. Avoid attention from competition authorities5. If company is focused on individual markets they will be more efficient

Answer 227

+Seperate firms hire their own managers which can lead to promotions-Trying to maximise efficiency, firms may make jobs redundant

Answer 228

+Gain from innovation and efficiency leading to higher quality products and cheaper goods-Demerged firms may lose economies of scale and instead raise prices, or reduce quality of goods

Answer 229

+Concentrating on a smaller business can make it more efficient and lead to greater innovation-Smaller business loses economies of scale and therefore reduced efficiency

Answer 230

TR = P x Q

Answer 231

AR = TR / Q = [P x Q] / Q = P

Answer 232

MR = ΔTR/ΔQ

Answer 233

Fixed costs do not vary with output. EG: Worker salaries, rent, business license etc.

Answer 234

As additional units of a variable input are added to a fixed input, the marginal product will eventually decrease as a result of other fixed factors of production.

Answer 235

Variable costs vary with output. EG: Wages, raw materials, delivery costs etc.

Answer 236

TC = TFC + TVC

Answer 237

AC = TC / Q

Answer 238

Initially, AC decreases as output increases, reaches a minimum point, and then rises due to diminishing marginal returns. Its lowest point intersects the MC curve.

Answer 239

Initially, as production increases, MC decreases, but it eventually rises due to diminishing marginal returns

Answer 240

When increasing the level of production leads to a fall in average (unit) costs.

Answer 241

The change in output or production as a result of proportional changes in all inputs.

Answer 242

The minimum level of output required to have fully minimised average costs.

Answer 243

1. Purchasing2. Technical3. Marketing4. Financial5. Managerial6. Risk-bearing

Answer 244

When a firm 'bulk buys' inputs in large quantities and can negotiate lower unit costs.

Answer 245

Increased technological efficiency in the production process, eg from specialisation and research and development

Answer 246

Where larger firms are able to lower the unit cost of advertising and promotion by 'bulk buying' marketing

Answer 247

Large firms have greater security and therefore it is easier to borrow and can negotiate lower interest rates on loans.

Answer 248

Larger businesses can afford to hire specialist functional managers, thus improving the organisation's efficiency and productivity.

Answer 249

Large firms can operate in various markets and diversify their risk, meaning if one area of the business or a market collapses they would still be able to operate

Answer 250

1. Increase in skilled labour influx2. Better and most cost-efficient transportation infrastructure3. Suppliers, R&D firms move closer to firm

Answer 251

When increaing the level of production leads to an increase in average (unit) costs.

Answer 252

1. Lack of control2. Lack of communication3. Lack of coordination

Answer 253

As the firm grows, owners lose control of their business as they hire managers. Due to the Principle-Agent problem, this can cause diseconomies of scale as managers may operate for self-gain, which may increase average costs as a result.

Answer 254

As the firm grows, it becomes more difficult for areas of the business to communicate effectively and efficiently, which can increase average costs.

Answer 255

As the firm grows, workers may begin to feel less motivated, and less valued. As a result, they may begin to slack as managers are less likely to notice, resulting in decreasing returns to scale.

Answer 256

1. Increasing land prices2. Increasing unit labour costs3. Tranport issues and geographical immobility4. Price of raw materials rising

Answer 257

Supernormal profit = TR - TC

Answer 258

Normal profit is when TR = TC or AR = AC

Answer 259

1. Plot MR, AR, MC, AC curves on a costs/revenues diagram.2. Draw a dot where MR = MC, then extrapolate vertically until it intersects both the AR and the AC curves.3. Draw a horizontal line from these curves and label P1 and C14. Shade in the rectangle between Q1P1C1 as the net supernormal profit.

Answer 260

When TR < TC or AR < AC

Answer 261

When increasing output leads to a greater loss than already incurred. This is when AVC > ARTherefore, the short-run shut-down point is when AVC = AR

Answer 262

Many firms may aim to revenue maximise as a growth in revenue a justifies to shareholders greater managerial rewards, as long as they provide some profits to the owners - Principle Agent Problem. Also, firms who wish to gain capital for reinvestment purposes may choose to revenue maximise in the short run so they can maximise profits in the long run.

Answer 263

Firms wishing to exploit economies of scale, or quickly gain market share may temporarily choose to sales maximise to increase output. Companies working in airline industry may opt for sales maximisation since there are high total fixed costs associated with it so they want to maximise 'bums on seats' to spread out these costs over a larger customer base

Answer 264

Due to the principal-agent problem, managers may prioritise personal benefits over profit maximisation, leading to profit satisficing where they aim to make enough profit to satisfy owners while pursuing other objectives like their own incomes.

Answer 265

1. Survival2. Allocative efficiency (P = MC)3. Minimise environmental impact4. Corporate social responsibility

Answer 266

1. Allocative efficiency2. Productive efficiency3. X-efficiency4. Dynamic efficiency

Answer 267

When resources follow consumer demand, and net social welfare is maximised. This is where MSC = MSB, and supply = demand. Therefore it is shown where AR = MC

Answer 268

When a firm operates at the lowest point on their AR curve, and they fully exploit economies of scale.

Answer 269

When a business minimises their waste meaning there are no excess costs.

Answer 270

1. Monopolies have no incentive to further enhance their efficiency as there is no competitive incentive2. Public sector firms have no incentive to further enhance efficiency as there is no competitive incentive

Answer 271

Production is anywhere on the AC curve, or on the PPF curve.X-inefficiency is shown by operating inside of the PPF or above the AC curve.

Answer 272

Reinvestment of long-run accumulation of supernormal profits into the business in the form of new capital, technology, innovation, research and development etc. leading to a downwards shift of the LRAC curve.

Answer 273

Downwards shift of LRAC

Answer 274

The quantity of labour that employers would wish to employ at each possible wage rate.

Answer 275

Firms hire workers to produce goods, so labour demand is derived from the demand for these goods and services, as businesses will only hire workers so long that the final product is demanded.

Answer 276

1. Demand for the final product2. Price of other factors of production3. Wages in other countries4. Technological advancements (capital-labour substitution)5. Labour market regulations6. State of the economy

Answer 277

1. Price elasticity of demand for the final product2. Proportion of wages to the total cost of production3. Substitutes to labour4. Time frame

Answer 278

The extra output produced from employing an extra worker

Answer 279

Δ (total output) / Δ (labour input)

Answer 280

The extra revenue a firm earns from employing an extra worker

Answer 281

MPL * Marginal Revenue= Δ (total output) / Δ (labour input) * Δ (total revenue) / Δ (total output) = Δ (total revenue) / Δ (labour input)

Answer 282

The MRP curve is the labour demand curve. The MCL curve is the supply curve for workers at a wage rate set by the perfectly competitive labour market (S = MCL, perfectly elastic). Firms will hire additional workers until MRP = MCL, meaning when the marginal revenue product of labour is equal to the wage rate, as this means that firms maximise revenue for a given number of employees.

Answer 283

Firms are in Perfect Competition, meaning that they are price takers leading to P = MR = AR.

Answer 284

-How do you measure productivity. hence MRP?-Teamwork makes it difficult to measure individual productivity-Imperfect labour markets involving trade unions?-Self employed?

Answer 285

MRP initially increases because each worker bring in extra revenue that the last due to specilisation gains and excess capital that can be utilised by workers, until the point of Diminishing Marginal Returns, where the fixed factors of production constrain MRP - can also be because of productivity.

Answer 286

The ability and willingness of people to make themselves available to work at different wage rates

Answer 287

1. Population and age demographics2. Non-pecuniary benefits3. Education, training and qualifications4. Trade unions and barriers to entry (eg. MBBS for doctor)5. Wages and conditions of other jobs6. Legislation

Answer 288

1. Level of qualifications and training2. Available of suitable labour in other industries3. Time frame

Answer 289

Originally increases due to the substitution effect, then there is a vertical section where the income effect = substitution effect. The curve bends back on itself due to the income effect as individual workers choose to work less and relax more because of a higher income.

Answer 290

The change in hours worked as wages rise due to the potential of individuals reaching a target income, can be positive or negative.

Answer 291

As wages rise, the opportunity cost of leisure time increases, providing an incentive to work, always positive.

Answer 292

-Wage bargaining to achieve higher wages-Improved working conditions-Greater job security

Answer 293

1. Labour is non-homogenous (different MRP, MCLs, discrimination)2. Non-monetary considerations (eg. fringe benefits etc.)3. Geographically immobility of labour4. Occupational immobility of labour5. Lack of perfect knowledge6. Trade unions and supply restrictions7. Monopsonies and wage setting ability

Answer 294

1. Labour suffers from geographical immobility2. Labour suffers from occupational immobility

Answer 295

+Incentive to gain skills, training and qualifications to improve incomes+Trickle down effect as high wage earners cause a multiplier effect in the economy leading to job creation+Encourages enterprise+Encourages work instead of welfare benefits+Efficient resource allocation: Workers feel rewarded by wages based on the value of their work

Answer 296

-Income inequality-May require more government finance on welfare spending-Can reduce long run growth and those on lower incomes have a high MPC-Social costs: Crime, depression, divorce, drug abuse etc. - More government finance on policing externalities-Trickle down effect may not occur-Government solutions are limited if they are the monopsonist employer

Answer 297

When there is a single dominant employer in a labour market that has significant wage-setting power and can push wages down - wage makers.For example, the state is a monopsony for public sector goods. They will maximise revenue from marginal labour by hiring until MRP = MCL, and reducing employment and wages since MCL is not equal to ACL.

Answer 298

+Increases an incentive to work+Reduces wage differentials+Fiscal benefit to the government as less people are on benefits and people pay more tax+Increased productivity from morale boost+Incentive for firms to boost human capital+Counter monopsonist employers

Answer 299

-Leads to real-wage unemployment (depends on elasticity)-Youth lose out the most-Those with wages above NMW may ask for higher wages as well (Wage-price spiral?)-Costly to businesses, may relocate or shut down due to lack of competitiveness-Does not account for regional costs of living differences

Answer 300

1. Increase progressive tax rate bands2. Reduce level of regressive tax3. Raise welfare benefits4. Raise minimum wages5. Impose maximum wage or cap bonuses6. Legislation like anti-discrimination or paternal leave7. Supply side policies like Government spending on education/training/healthcare

Answer 301

1. Raise progressive tax rates: Laffer curve, distorts incentive to becomes more productively efficienct and take more risks, etc. - less Government revenue2. Reduce regressive tax rates: Government earns less money may lead to increased long-run borrowing or austerity in the future

Answer 302

1. Poverty trap as it reduces to the incentive to find work 2. Strenuous on government finances and can lead to fiscal austerity

Answer 303

1. Minimum wages are costly to businesses and can cause unemployment2. Maximum wages may reduce the incentive to be entrepreneurial

Answer 304

1. Costly to businesses - shut down or reduced competitiveness2. Costly for the government to enforce3. May lead to government failure if businesses shut down or relocate as unintended consequences

Answer 305

1. Expensive on government finances2. Can take a long time for it to take effect in the economy

Answer 306

The ever increasing integration and interconnectedness of global economies into a single international market.

Answer 307

1. Improvements in transport infrastructure2. Improvements in communication and I.T.3. Trade liberalisation4. International financial markets5. Growth of Transnational Corporations (TNCs)

Answer 308

+Greater choice of goods (luxury foreign goods)+Lower price (comparative advantage, reduced barriers to free trade)-May lead to higher prices as increasing incomes can increase demand for goods-Loss of culture

Answer 309

+TNCs create jobs and offer training for workers+Increased demand for high-skilled labour drives wages up-Inequality from poor working conditions and low wages for low-skilled workers-Inwards migration may lower wages (increased labour supply)

Answer 310

+Advanced technology brought in by TNCs may spillover into other industries+Risk-bearing economies of scale as they sell in more countries+Able to exploit cheap labour-Firms unable to compete with TNCs will die out

Answer 311

+Gain more tax revenue from TNCs paying corporation tax-TNCs have lobbying power over governments which can lead to corruption and bribery-Government may lose out from tax avoidance or evasion

Answer 312

-Increased world production means more raw materials are mined-Therefore more global greenhouse emissions

Answer 313

+Encourages foreign direct investment (FDI)+Positive multiplier leads to greater final injection+Incentivises domestic firms to improve efficiency which can lead to greater net economic efficiency (LRAS increase)-If consumers import more than firms export, this can cause a trade deficit and counteract the economic growth

Answer 314

Where a country can produce a product at a lower opportunity cost than another.

Answer 315

Where a country can produce more goods with fewer inputs than other (therefore more efficiently).

Answer 316

To maximise world efficiency in allocating scarce resources, countries should trade with one another and export the goods they have a comparative advantage in, this is mutually beneficial to both parties.

Answer 317

It is assumed that:-No transport costs-Costs are constant and there are no economies of scale-Goods are homogenous-Factors of production are perfectly mobile-No tariffs-Perfect information

Answer 318

+World output can be increased if countries specialise+Economies of scale, reduces costs and prices+Market competition encourages innovation+Greater choice of goods

Answer 319

-Over dependence structural unemployment-Negative externalities on environment-Loss of autonomy and sovereignty

Answer 320

An agreement between two or more countries to encourage free trade by reducing or eliminating protectionist barriers such as tariffs, quotas etc.

Answer 321

A Bilateral trade agreement is between two countries. A Multilateral trade agreement is between more than two countries.

Answer 322

The process by which separate economies become more interconnected through the reduction or elimination of trade barriers.

Answer 323

1. Preferential Trade Agreement2. Free Trade Area3. Customs Union4. Common Market5. Monetary Union6. Economic Union

Answer 324

+Can lead to trade creation+Creates jobs if output is increased+Increased competition encourages innovation and efficiency+Larger consumer market leads to economies of scale+Greater choice of goods

Answer 325

-Can lead to trade diversion-Oligopolistic competition as inefficient firms driven out-Retaliation and trade disputes-Reduced national sovereignty

Answer 326

Tariffs are reduced on selected goods

Answer 327

+Lower prices for consumers+Promotes intra-regional trade+Enhances world efficiency through specialisation

Answer 328

-Government spends resources on a unsubstantial trading bloc-Inefficiencies in resource allocation if inefficient producer produces goods

Answer 329

+Promotes intra-regional trade+Lower prices for consumers+Enhances world efficiency through specialisation

Answer 330

All tariffs and quotas are removed between member countries, however they are free to impose their own tariffs on countries outside of the bloc.

Answer 331

-Government spends resources on a unsubstantial trading bloc-Can cause current account deficit

Answer 332

+Promotes intra-regional trade+Stimulates competition and innovation+Enhances economic efficiency through specialisation

Answer 333

Free trade between members, and a Common External Tariff is placed on non-member nations.

Answer 334

-Trade diversion-Retaliation and trade disputes from non-members

Answer 335

Free movement of factors of production between members.

Answer 336

+Increased geographical mobility so workers are able to relocate+Transfer of skills, knowledge and technology

Answer 337

-Brain Drain-Unequal distribution of benefits

Answer 338

Countries share the same central bank, monetary policy and currency.

Answer 339

1. Share a common currency: Euro2. CPI Inflation target is 2%3. Euro floats as a currency against the USD and GBP4. Member nations must not run large budget deficits (>3% of GDP)

Answer 340

+Increases business confidence (non-fluctuating exchange rate and stable currency allows them to predict future investment plans)+Eliminates the cost of currency conversion+Protects currency against speculation and eliminates asymmetric information - prices easy to compare

Answer 341

-Cost of changing currency is high (notes in circulation, menu, admin, removing old notes etc.)-Loss of Monetary Policy autonomy-Countries are unable to alter their exchange rates to change C.A balance-Increased interdependence between nations

Answer 342

1. Free movement of capital and labour2. Automatic fiscal stabilisers in place3. Share the same business cycle

Answer 343

1. Inflation rate can't be more than 1.5% higher than the union's 3 best performing members2. Long-term interest rates can't be higher than 2% above the union's 3 best performing members3. Should not be in excessive fiscal debt4. Must have a stable currency against the Euro

Answer 344

Fully integrated economies, complete coordination of fiscal, monetary and social policies.

Answer 345

When low cost, efficient producers with comparative advantage within a trading bloc replace high cost domestic producers.

Answer 346

Shows the removal of a tariff from a foreign producer following the creation of a trading bloc where the perfectly elastic supply curve moves down, showing an increase in output from a more efficient producer. Government revenue is lost, previously lost world efficiency and consumer surplus are gained.

Answer 347

When high cost, inefficient producers within a trading bloc replace more efficient foreign producers with comparative advantage following the imposition of a Common External Tariff.

Answer 348

Shows the perfectly elastic supply curve of the producer with comparative advantage shifting upwards above the trading bloc after a common external tariff is imposed. Lost world efficiency, lost bloc efficiency, lost consumer surplus.

Answer 349

The quantity of exports that need to be sold in order to purchase a given level of imports.

Answer 350

[Average export price index / Average import price index] *100

Answer 351

SR: Exchange rates, inflation rates, supply and demand of exports and importsLR: Changes in incomes, Long run productivity

Answer 352

1. Improvement in terms of trade lead to a fall in (X-M) which can cause a fall in GDP and rise in unemployment2. If PED of X and M is inelastic, improving TOT = improving CA3. If PED of X and M is elastic, improving TOT = worsening CA4. If export demand has caused improvement TOT then this is beneficial5. Important to consider export revenues

Answer 353

If exports are price elastic, a rise in export prices leads to an increase in terms of trade but worsen current accountIf exports are price inelastic, a rise in export prices leads to an increase in terms of trade and current account.If imports are price elastic, a rise in import prices leads to a decrease in terms of trade but improve current accountIf imports are price inelastic, a rise in import prices leads to a decrease in terms of trade and current account.

Answer 354

There will be a long run decline in the terms of trade for countries that depend on natural resource exports.This is because it is hypothesised that import prices will rise faster than export prices as countries export commodities with an inelastic YED, but import manufactured goods with an elastic YED.

Answer 355

1. Establish trade liberalisation and encourage free trade2. Make sure countries act according to trade agreements3. They hold 'rounds' where representatives gather

Answer 356

-All countries must agree for an agreement to take place-Veto may be politically motivated (eg. retaliation)

Answer 357

The removal of protectionist policies with the aim of encouraging free trade between countries.

Answer 358

+More effcient allocation of resources through comparative advantage and specialisation gains (potential for trade creation)+Encourages competition between producers+Leads to greater innovation and dynamic/static efficiencies+Global market for producers and greater choice for consumers+Job creation in exporting industries+Political peace and stability

Answer 359

+Deadweight gain of world efficiency+Improved market competition incentivises business efficiency, productivity and research/development+Firms have access to global market which can lead to economies of scale+Consumers have greater choice of goods

Answer 360

-Government loses tax revenue-Overspecialisation can be risky-Structural unemployment if demand shifts from domestic suppliers to imports-Domestic firms unable to compete-Income inequality

Answer 361

The use of economic policies to regulate free trade between countries with the aim of reducing imports

Answer 362

1. Protect domestic employment2. Infant industry argument3. Protect from dumping (market flooding from surpluses)4. Protects against unfair competition5. Mitigates the risk of over specialisation in one industry

Answer 363

1. Tariff: A tax imposed on imports2. Quota: A restriction on quantity of imports3. Subsidy: Aims to boost domestic production4. Embargo: A complete ban on imports5. Regulations: Quality and legal reasons some goods can't be sold in the country

Answer 364

Foreign country is assumed to have comparative advantage, so the perfectly elastic supply curve lies below the equilibrium point of the domestic market. Imposing a tariff shifts their supply curve up, leading to reduced imports, increased domestic production, DWL of world efficiency, gain of government revenue and DWL of decreased consumer surplus

Answer 365

Imposing a subsidy on domestic production shifts their supply curve outwards to Sd + Sd+subsidy. Price in the market is unchanged (although, there is an effective change in price for producers) - there is no change in domestic demand, so no DWL of consumer surplus. There is a DWL of efficiency as inefficient domestic producers begin to supply more and government expenditure is e + f + g.

Answer 366

Imports reduced from Q1Q2 to new Q1Q3. Domestic supply shifted outwards parallel to original supply curve, and increases from Q1 to Q1 + Q3Q4. Domestic demand constracts from Q2 to Q4. Excess demand (Q3Q2) is satisfied by an increase in price from P1 to P1+quota. There is a DWL of efficiency and consumer surplus, as a more inefficient domestic producer is supplying more goods (Q2Q4).

Answer 367

The purchasing power of a currency in terms of what it can buy of another. The bilateral exchange rate is simply the value of one currency in terms of another.

Answer 368

Purchasing power parity uses a basket of goods and services and measures the price of specific goods in different countries. It is also used to compare the absolute purchasing power of the countries' currencies.

Answer 369

The spot exchange rate is the rate of a foreign-exchange contract for immediate delivery. Spot rates are the price that a buyer will pay for a foreign currency.

Answer 370

The forward exchange rate is what a foreign currency is agreed to be worth at some time in the future. A company can enter into a forward contract on exchange rates to help hedge against exchange rate fluctuations.

Answer 371

An exchange rate system where the value of the currency is determined purely by the forces of supply and demand. Most systems are floating.

Answer 372

An exchange rate system where the government sets their currency against another and that exchange rate does not fluctuate.

Answer 373

1. Increase in relative interest rates (hot money inflows)2. Speculators anticipate appreciation of currency3. Increase in Foreign Direct Investment (FDI)4. Rise in foreign incomes5. Increase in international competitiveness (e.g. reduced relative inflation, lower unit labour costs etc.) --> Firms move in

Answer 374

1. Decrease in relative interest rates (hot money outflows)2. Speculators anticipate depreciation of currency3. Rise in domestic incomes4. Decrease in international competitiveness (e.g. high relative inflation, high unit labour costs etc.) --> Firms move away

Answer 375

+Cheaper to import which can boost living standards+Can tackle demand-pull inflation+Increased competition --> Efficiency gains domestically

Answer 376

-Increased imports, reduced exports --> C.A deficit-Reduced economic growth-Higher structural unemployment rates in exporting industries

Answer 377

+Reduced imports, greater exports --> C.A surplus+Higher economic growth+Lower rates of unemployment

Answer 378

-Higher inflation-Will only lead to a C.A surplus if Marshall-Lerner condition is met

Answer 379

A devaluation of a currency will only lead to a rise in the trade balance if the combined elasticities of demand for exports and imports is greater than one.

Answer 380

Financial markets are where buyers and sellers can buy and trade a range of monetary or financial services and assets.

Answer 381

1. Facilitate savings2. Lend to businesses and individuals3. Facilitate exchange of goods through a payment system4. Provide a forward market5. Provide an equity market

Answer 382

Transfer spending power from the present into the future by storing money in a savings account or holding shares in the stock market.

Answer 383

Act as a financial intermediary as the step between taking the money from one person to another, since money from savings is used for investment. Lending allows and encourage consumption, investment and government spending.

Answer 384

Create a payment system, central banks print notes, institutions process digital transations, companies offer offer credit card services, banks buy and sell foreign currencies.

Answer 385

When parties agree to buy or sell an asset at a future date for a price determined in the present.

Answer 386

When a price is agreed for a transaction that will be carried out at some future date - involves high levels of market speculation.

Answer 387

The forward market exists for commodity markets and in foreign exchange, and helps to protect against speculation by providing stability.

Answer 388

Where stocks and shares of companies are bought and sold.

Answer 389

Stock markets provide a way for owners to create liquidity in the market which allows for firms to finance expansion, however people would be unlikely to buy shares if they were unable to sell them later.

Answer 390

Financial market in which borrowing is facilitated for a short-term, typically under one year.

Answer 391

Financial market in which longer-term (> 1 year) financing is traded - includes Government bonds, shares.

Answer 392

A financial market in which a transaction is made immediately at the prevailing price.

Answer 393

A market where different currencies are traded, they can be spot markets, contract for the present, or forward markets where contracts are made for some time in the future. Highly speculative market are financial institutions aim to make a short-term profit from a volatile market.

Answer 394

Where raw goods like gold, oil, and agricultural products are bought and sold.

Answer 395

Derivatives in finance are financial contracts whose value is derived from the performance of an underlying asset, index, or rate.

Answer 396

Where people buy and sell financial assets that are based on the value of other financial assets, eg. CDOs values were based on the performance of U.S. mortgages.

Answer 397

Where individuals, firms and governments can buy insurance. Involves risk assessment and mitigation so no insurance company carries too much risk in case of a disaster.

Answer 398

A collateralised debt obligation is a financial derivative from the mortgage market.

Answer 399

Investment bankers invested heavily in CDO's due to their ever-increasing values in the housing market caused by vast speculation and false credit ratings creating a market bubble as a result.

Answer 400

Subprime mortgages were sold without proper documentation or proof of income, which led to defaults by ineligible homeowners, causing a surge in home supply, a drop in home values, and consequetly reduced demand due to a negative wealth effect. This, coupled with increased mortgage defaults, contributed to the bursting of the CDO bubble.

Answer 401

A financial contract agreement acting like insurance that the seller will compensate the buyer in the event of a debt default.

Answer 402

A sudden reduction in the general availability of loans or credit in financial markets.

Answer 403

1. When lenders have limited funds available to lend2. Lenders are unwilling to lend additional funds3. Lenders have increased the cost of borrowing to a rate unaffordable for most borrowers

Answer 404

Mortgage loans that are granted to borrowers who do not qualify for conventional mortgage, they do not ask for proof of income or any documentation.

Answer 405

UK MPC implemented signifcant expansionary measures by lowering interest rates to 0.5% in 2009 and a new system called Quantitative Easing, by increasing the money supply to reduce long-term bond interest rates to stimulate the economy.

Answer 406

Market bubbles in financial markets arise when asset prices significantly exceed their intrinsic values due to speculative buying, leading to a sudden and unsustainable increase in demand.In 2008, CDOs led to excessive speculation and the belief that they will ever-increase because they were caused by prime mortgages led to a crash as they were in fact subprime mortgages.

Answer 407

Asymmetric information in financial markets occurs when one party has more perfect information than the other. During the 2008 Recession, the real rating of mortgages was unknown by investment banks as credit rating agencies rated subprime mortgages as prime with AAA ratings.

Answer 408

Externalities in financial markets arise when the actions of one party affect others without corresponding compensation or recognition.In 2008, the burst of the CDO market bubble led to not only investors being harmed, but the cost of bailing out the banks was to the taxpayer, alongside there being significant job losses.

Answer 409

Moral hazards arise in financial markets when individuals or institutions take risks, knowing that they won't bear the full consequences of their actions.Financial institutions were accused of pursuing short-term profit by taking excessive risk because they would be bailed out by the governments again.

Answer 410

Market rigging in financial markets occurs when participants manipulate market conditions or prices to gain an unfair advantage.

Answer 411

When regulatory agencies, instead of serving the public interest, become influenced or controlled by the industries they are meant to regulate.

Answer 412

Investors were lured into buying shares of the South Sea Company, expecting huge profits from overseas trade. However, the company's actual operations were limited, and the bubble burst, causing a financial crisis and substantial losses for investors in 1720.

Answer 413

Involved the widespread mis-selling of insurance to customers in the UK alongside loans and credit cards. Financial institutions misled consumers, and when the scandal surfaced, these institutions faced large compensation claims for the mis-sold policies, leading to financial and reputational consequences.

Answer 414

Involved the manipulation of the London Interbank Offered Rate (Libor), a key interest rate. Banks were found to have submitted false rates to benefit their own trading positions. The scandal led to fines for major financial institutions.

Answer 415

Where a large number of depositors rush to withdraw their money from a bank due to concerns about the bank's solvency or financial stability. This can lead to a crisis for the bank if it faces liquidity issues and struggles to meet the sudden demand for withdrawals.

Answer 416

To reduce the risk of a negative outcome by making additional investments or taking precautions.

Answer 417

1. Control monetary policy through interest rates and the money supply to keep inflation low and stable2. Act as a bank to the government3. Act as a bank to other banks4. Regulate the overall financial market

Answer 418

Regulation includes preventing market rigging, banning unsuitable product sales, capping interest rates to avoid consumer exploitation, ensuring deposit insurance for stability, and enforcing liquidity ratios for prudent banking.

Answer 419

Rules and standards imposed by financial regulatory authorities to ensure the stability and soundness of financial institutions, protecting the interests of depositors, investors, and the overall financial system

Answer 420

It identifies and monitors risks that threaten the resilience of the UK financial system as a whole. It also has power to take action to counter those risks. An example of such a risk is unsustainable levels of debt and credit growth.

Answer 421

Responsible for the prudential regulation and supervision of around 1,500 banks, building societies, credit unions, insurers and major investment firms.

Answer 422

Responsible for the regulation the conduct of nearly 45,000 businesses in the UK to ensure that financial markets work well and fairly.

Answer 423

Protects consumers when financial institutions fail. If a bank collapses, consumers and businesses are eligible for a claim of up to £85,000.

Answer 424

Regulatory authorities present hypothetical economic 'What If?' scenarios to commercial banks such as high inflation and unemployment based on the UK's economic cycle. It also ensures these banks hold a minimum reserve of liquid capital to absorb losses in case of a crisis.

Answer 425

The risk that is inherent to the entire market which cannot be eliminated through diversification and is associated with economic downturns, changes in interest rates and geopolitical events.

Answer 426

UK banks are required by UK law to separate core retail banking services from their investment and international banking activities to prevent risky decisions made by commerical banks affecting consumers.

Brainscape's Knowledge GenomeTM

Economics Flashcards

Brainscape's Knowledge Genome^TM