Economics - Unit 3 Flashcards
What is a negative externality?
The external cost of an economic transaction on a party who is not directly involved
What is specialisation?
Being better than another country at providing a good or service in terms of the quantity of output and lower costs
Give example of a negative externality
Pollution - health disadvantages more money on NHS or global warming
Congestion - takes longer to get to work therefore decreases productivity and output
Loss of habitat - animals made extinct
Why does the UK have a current account deficit?
Loss of advantage in many industries
- manufacturing in uk replaced by exports
Globalisation
- cheaper to produce goods where the labour costs are low
Growth in peoples real income
- demand rises more quickly than supply so there is a shortage of goods the gap is filled with imports
Exchange rate
- stronger pound mean can buy more abroad also means exports are more expensive
Lower levels of productivity
- can produce that many exports
Relatively weak product innovation
- low rate if spending on R+D
What is absolute poverty?
Having less than $1.25 a day to live on
What is foreign aid?
Giving money or resources from one country to another in order to help that country
What is absolute advantage?
When a country is able to provide a good or service using fewer resources and at a lower cost than another country
What is protectionism?
Where an action is taken that reduces international trade
What is a tariff?
A tax placed on imports to increase price and decrease quantity demanded
Why do countries want to protect industries?
IDPPP
Infant industries - new industry that if developed could be an economic advantage
Dumping - to prevent countries from selling below the cost of production in a market to gain market share and then raising their prices to make huge profits
Prevent unemployment - stoping foreign goods being sold on a market is the only way to prevent unemployment
Preventing negative externalities - stops stuff like drugs being put in the UK market
Political - imposing methods to protect vital industries
How might a company protect their industries?
Tariff- putting a tax on the good to make it more expensive
Quota - putting a physical limit on the number of goods allowed to be imported
Embargo - banning goods
Rules and regulations - imposing strict laws to make it difficult for the product to get into the UK
Often ends in retaliation
What are the benefits of globalisation to the UK?
- produce goods at low costs in other countries
- low inflation due to greater competition
- sustained economic growth
- high foreign investment
- foreign companies set up in the UK bringing employment with them and new ideas
- more skilled workers
- wide range of products
What are the costs of globalisation to the UK?
- firms may go abroad to low cost countries
- loss of jobs and industry
- current account of balance has shown a large deficit
- environmental problems
- harder for smaller businesses to enter market
What is the current account?
The balance of trade in goods and services plus net investment incomes from overseas assets
What is a balance of trade in goods?
The export of goods from the primary and secondary sector minus the import of these goods
What is a balance of trade in services?
The export of territory sector services minus the import of these services
What is global interdependence?
Countries cannot exist alone but rely on each other
What limits countries from benefiting from globalisation?
- poor health care, this means poor productivity and this will stop investors from investing
- poor infrastructure, increase cost of production as its hard to get goods places with no ports or airports, therefore decreasing global competitiveness
- lack of education, decrease in human captain means less productivity therefore less FDI is attracted and the output of a country will decrease and there economy shrink
- corruption, if countries are to corrupt than the money does not go to the industries or population so there is less investment
- availability of resources, if there is a lack of resources than the country wont be able to gain specialisation or absolute advantage, which will stop them competing in the global market therefore they will have to import
materials, this will increase the cost of production - debt, money is spent on repaying debt rather than infrastructure and education which will increase the productivity and make the economy grow, this is opportunity cost
- rapid population growth, as the population increases there is a increase in the strain of resources like housing and health care, this will decrease GDP per capita
- high inflation, can lead to hyperinflation. The exchange rate will be more changeable as therefore there is more uncertainty so firms wont invest
- war and civil war, decrease the workforce therefore decrease productivity, government spending focuses on war and not other things, hard to export and import, child soldiers lose there education
What is globalisation?
An expansion of world trade in goods and services leading to greater international interdependence
When did globalisation start?
- stage 1 1870s - increased international trade and new technology helped improve transport and reduce costs of moving between countries this ended in1920s as countries started to protect industry against foreign competition and restricted imports
- stage 2 After 1945 - countries were keen to build up economies again, rapid expansion in world trade and international monetary fund and world bank were funded to promote trade and economic cooperation between nation
- stage 3 now - huge increases in world trade and capital flows between countries, growth of huge companies who mass produce and gain economies of scale
What factors have contributed to globalisation?
- improvements in transportation
decrease in cost of transportation due to new tech and competition - improvement in information and communication
Internet made communication info cheap and quick you can promote products via the internet - rising in real living standards
Richer countries demand more goods and a wide range in choice this increase in consumer demand stimulated world trade - decline in protection
Countries encourage trade so fewer barriers - economies of scale
Tech improvements mean that companies can mass produce to large markets this takes advantage of cheaper production costs include new labour
What is a multinational company?
A company that has operations all over the world
How do multinationals become successful?
Increase quality and low costs
They take advantage at what different countries are best at so they save money
What are the advantages of multinationals?
- gain a strong foothold in international markets
Need to gain economies of scale
-cheap labour costs
Wages are a large part of production costs - ability to take advantage of different strengths of many countries
Cheap labour and availability of raw materials - transport/ distribution costs
Production plants all over the world so they don’t have to pay for shipping - favourable tax environment
Some countries charge lower taxes - availability of government grants
Gov could offer grants to set up in a particular area usually high unemployment
What are the disadvantages of multinationals?
-loss of jobs
Multinationals may decide to relocate and this could lose jobs
- export of technology
Jobs lost as tech moves with multinationals
- dependency on imports
Wider range of choices lead to vulnerable to closers
- loss of tax revenues
Much of the profit will go back to the base of the company not the country its in
What is international trade?
The exchange of goods and services across the international boundaries
What are the benefits of international trade?
- obtain goods that are not in there own countries
- increased choice
- enables goods and services to be obtained at a low cost
- prevents monopolies
- increased competition
- gain economies of scale
- reduces reliance on domestic markets
- increased world output
What is air miles?
The amount a product has to be travelled this contributed to global warming
What is the idea of the WTO?
To remove barriers to free trade and grow international trade
What is a free trade?
An absence of tariffs, quotas and regulations designed to reduce or prevent trade among nations
What are the benefits of free trade?
- enables people to sell their product to those who are willing to pay the highest for them therefore the original producer is able to get a larger proportion of the value for the product
- more chance of goods at the lowest possible price this is because the goods made where most efficient and with no barriers so more money
- increased competition encouraged firms to innovate
- exports of goods and services will increase economic growth - as world trade increases more jobs will become available
- encourages efficiency- not only in use but where they are used
- increase world output and wealth - trade increases output
What is the point of the world trade?
- responsible for trying to increase free trade
- provides a set of rules so that members know what they are and are not allowed to do
- settles disputes
- advanced through a series of negotiations
- does not always support free trade and can support trade barriers to protect consumers and stop spread of disease
Whats India’s problems?
- millions of poor illiterate people who have not benefited nor can contribute to output and growth in services
- china more successful at obtaining FDI
What is chinas problems?
- has to move from the manufacturing of cheap goods dependent on western demand to become an economy of producing goods and services with the developed world
What are the benefits of India and China to the uk?
Larger market for UK exports and demand for services
Cheap imports the prices of products such ad clothes and toys kept low by cheap imports this controls inflation and increases real income
What are the disadvantages of India and China to the UK?
Increased global warming
Loss of manufacturing jobs as firms move to cheapest production cost countries
Rising costs of raw materials because of increased demand from china and india outstrips supply
What is a single market?
The economies of different countries can be treated as one when a firm in considering its domestic market
What does a single market mean?
- no protectionist measures on trade between state members
- elimination of border control
- free movement of people
- mutual recognition of qualifications
- making taxes, industrial and economic laws the same
What are the main advantages of a single market?
- specialisation and economies of scale
Countries can gain from free trade and specialisation band economies of scale due to them having a bigger market - free movement of capital
Inward investment and increased employment as firms move to the EU to gain a bigger market - free movement of labour
Anyone who is a EU citizen has the right to work anywhere in the EU - competition
Increased competition lead ms to improved productivity and r+d - higher economic growth and standards of living
Joining in EU gives you better growth therefore money put into living standards
What are the main disadvantages of a single market?
- Job loses- increased specialisation can lead to unemployment or more jobs
- attract capital and jobs away from richer countries to population centre in EU
- manufacturing firms attracted to low labour costs - cheaper costs of production so less production in UK
- multinationals- economies of scale can drive out local businesses leading to large companies becoming monopoly powers and gaining market share
What is the exchange rate?
How much of one currency needs to be given to buy one unit of another currency
How do you convert pounds to another currency?
X amount of pounds by exchange rate
How do you convert foreign currency to pounds?
/ amount of currency by exchange rate
What is the floating exchange rate?
Where prices of two currencies are decided by the market forces
What is a fixed exchange rate?
Where the central bank of a currency decided on the price of a currency
What is a single currency?
A group of countries that agree to adopt the same currency and have one monetary policy
What are the advantages of a single currency?
- elimination of exchange rate risks
Removes the danger of prices changing before payment made - price transparency
Easier to compare and get best value for money - transaction costs
Increase trade as no need to change money - employment
Easier for people to cross in next country and work as salary paid in same currency - long term planning
Clearer and better information on input cost and competitors prices - single monetary policy
Increases certainty of firms being allowed to borrow for investment
What are the disadvantages of a single currency?
- sensitivity to interest rates
The uk housing market is sensitive to interest rates as most UK householders own there house and have a mortgage which is a big percentage of there income, therefore interest rates are very sensitive so the UK monetary policy has to take this into consideration - Recession
UK can respond more quickly and cut interest rates to stimulate the economy and by decreasing the interest rate the exports are cheaper
How does a change in interest rates affect the exchange rate?
If interest rates increase than more foreigners will be attracted to our banks and they will move their money ‘ hot money’
- they will have to sell there currency in return for pounds thus increase demand and the price for sterling will increase
What is international competitiveness?
The ability of companies to compete with companies from other countries
How do exchange rate affect trade and international competitiveness?
If the pound is stronger than it will increase the export and decrease the amount of exports as the orices are more expensive thus decreasing our competitiveness
- increases the current account deficit
What is competitiveness?
The ability of a country to compete successfully internationally and maintain improvements in real output and wealth
Why are wages important for competitiveness?
If wages decrease than the cost of production decrease which means firms can decrease price and undercut competitors due to a higher demand
Why is relative unit cost important for competitiveness?
If the unit price decrease than the cost of the product decreases in price snd demand will increase making us more competitive
Why is the exchange rate important for competitiveness?
If the pound is stronger and the exchange rate rises than UK exports cost more therefore we our less competitive however imports are more cheaper and competitive than the UK
- can have an immediate effect on our competitiveness
How does imported materials have an affect on competitiveness?
UK goods are manufactured using a lot of imported materials which are cheaper therefore they can lower the cost of production and therefore the price, this would offset the rise in exchange rate
Why is productivity important to exchange rate?
If you increase the productivity it decreases the cost of production therefore decreases the price and increase the competitiveness
What are the costs that affect competitiveness?
Raw materials
- The UK imports raw materials so if the price of raw materials increase than the cost of production increases therefore prices will increase and decrease competitiveness
Government regulations
- there is a lost of competitiveness as lower productivity due to time spent on filling out sheets
Keeping up to date
- maintain and improve skill and get the latest equipment in order to increase productivity
Low inflation
- if inflation decreases than price is decreased this makes more competitive exports, if no low inflation than more products will be brought from abroad and this will cause a current account deficit
Why is sustainable economic growth important?
If economic growth cannot be sustained than this will decrease living of standards and increase unemployment and decrease competitiveness
What is FDI?
The investment by foreign companies in the production of goods and services in another country
What are the polices designed to increase international competitiveness?
- Education and Training
If you increase skill you will be increasing human capital, and therefore productivity can increase competitiveness as you will be producing more GDP therefore lowering the price
- time lag
Withkut an educated workforce no other policie will work
Get rid of rules and regulations so ots easier to get planning permission this will increase FDI
Decrease the national minimum wage this will lower fixed costs - Fiscal
If you decrease cooperation tax and VAT you will increase spending of firms as they will want to invest, it will also increase consume expenditure therefore increasing employment and firm income, therefore firms may lower price of their products increasing demand - Monetary
This will decrease interest rates and will cause a depreciation of the pound, therefore increase spending on exports snd decrease hot money making us more competitive
What are NGOs
Non government organisations such as Oxfam and save the children, they are for specific purposes and are focused on particular problems
What is relative poverty?
When you income is 60% less than the median income in the economy (the extent to which a persons income falls below the average income of the economy)
What are the economic impacts of high rates of poverty?
- increase in benefits, this will increase government spending
- increase in budget deficit and therefore debt
- less money spent on education, so less human capital means less productivity and a decrease in GDP
- increase in welfare payments to top up low income, this is an opportunity costs to education
- poor health due to lack of health care, shelter, food this will increase spending in health care and drain government resources
- poor health means people are less able to work therefore this will increase sick days and decrease productivity and GDP
- less tax revenue
- increase in negative externalities
- low income earners are more likely to turn to crime this will increase the black market and cost of prisons and police
Whats are the policies aimed at reducing poverty?
- Supply-side
Invest in human capital, this will increase productivity and GDP in the long term
On the other hand people may drop out and its an opportunity cost, it also takes a long time - National minimum wage
Les state benefits, more employment therefore increase in productivity and GDP, higher incomes so people are more likely to spend
More may become unemployed as the employers cant pay wages and of wont decrease poverty because most household earners don’t have a low paying person, it will increase inequality
More relative - Monetary policy
Lower inflation, more spending and more demand therefore they will need more supply this will increase the demand for workers, poverty will decrease this is more absolute and doesn’t make a difference to relative
