Edexcel A Economics - Theme 4 Flashcards
What is globalisation?
The ever increasing integration of the world’s local, regional and
national economies into a single, international market.
What are the characteristics of globalisation?
Free trade of goods are services
Free movement of capital and labour
Free interchange of technology and intellectual capital.
Increased FDI
Global branding and increased inter dependency..
What factors have continue to globalisation?
Trade in goods
Trade in services
Trade liberalisation
Multinational Corporation (MNCs)
International financial flows
Communications and IT
Containerisation
How has the trade in goods contributed to globalisation?
Developing countries have capital and knowledge to manufacture goods.
MNCs take advantage of cheaper labour abroad.
How has the trade in services contributed to globalisation?
Trade in tourism, call centres and software production had increased from developing countries to developed countries.
How has the trade liberalisation contributed to globalisation?
Growing strength and influence of WTO advocates free trade which has reduced trade barriers.
How has MNCs contributed to globalisation?
MNCs are organisations which own or control the production of goods and
services in multiple countries.
Marketing has become global and by growing this take advantage of economies of scale.
Spread of technological knowledge and EoS has led to lower costs of production.
How has international financial flows contributed to globalisation?
The flow of capital and FDI across international borders has increased.
There has been more
investment in factories abroad.
How has communications and IT contributed to globalisation?
The spread of IT has resulted in it becoming easier and cheaper to
communicate, which has led to the world being more interconnected.
Better transport links and easier transfer of information.
How has containersation contributed to globalisation?
Cheaper to ship goods across the world.
Prices fall, more competitive markets.
Helps meet world demand.. Economies of scale and less labour needed.
However, mainly MNCs which exploit this and can lead to structural unemployment.
What is the impact of globalisation on individual countries?
Trade imbalances.
Inequalities in consumers and countries access to health, education and markets.
Income and wealth inequalities.
Weakened culture due to global brands. However, helped spread culture and helped improve quality of life.
What is the impact of globalisation on governments?
Lose sovereignty due to increase in international treaties.
What is the impact of globalisation on producers and consumers?
Consumers and producers can earn the benefits of specialisation and economies of
scale as firms become larger.
Firms operate in a more competitive environment.
Producers lower average costs by switching to cheaper labour.
Increase world GDP, increases living standards and help lift people out of poverty.
Rise in average consumer incomes.
Some consumers gain more from globalisation than others. Globally, there are fewer people in extreme poverty, but this has not been the case in Sub-Saharan Africa.
Consumers could take advantage of a wider range of goods and services because of the increased availability of goods and services.
What is the impact of globalisation on workers?
Workers can take advantage of job opportunities across the globe.
Structural unemployment.
Production shifts labour to other countries.
Countries would have had the change from
agriculture to manufacturing to services anyway, and globalisation simply sped it up.
When production shifts to lower labour cost countries, the creation of jobs could be
seen as either beneficial or harmful.
On one hand, MNCs could be exploiting their
labour and providing poor working conditions in. On the other hand, working in a sweatshop might provide a higher, more stable income
than any alternatives
What is the impact of globalisation on the envirnment?
Increased consumer living standards might lead to
more pollution through increased production and increased car use.
Consumers might show more concern towards the environment as their average incomes
increase.
What is comparative advantage?
Comparative advantage occurs when a country can produce a good or service at a lower opportunity cost than another country.
This means they have to give up producing less of another good than another country, using the same resources.
What is absolute advantage?
A country has absolute advantage in the production of a good or service if it can produce it
using fewer resources and at a lower cost than another country.
What are the assumptions and limitations of comparative advantage?
Assumes a perfectly competitive market.
Does not consider exchange rates.
Countries can develop an advantage in production.
Comparative advantage is a model that only uses 2 countries.
What are the advantages of specialisation and trade in an
international context?
Greater world output, so there is a gain in economic welfare.
There could potentially be higher quality, since production focuses on what people and businesses are best at.
A greater variety of goods and services
Lower average costs, more competitive.
There is an increased supply of goods to choose from.
There is an outward shift in the PPF curve.
More opportunities for economies of scale
What are the disadvantages of specialisation and trade in an
international context?
Less developed countries might use up their non-renewable resources too
quickly, so they might run out.
Countries could become over-dependent on the export of one commodity,
There could be more structural unemployment, since production moves
abroad.
Some countries might become stuck in the production of one good or service, so they cannot develop further.
What are the factors affecting patterns of trade?
Comparative advantage
Impact of emerging economies
Growth of trading blocks
Changes in relative exchange rates.
What is terms of trade?
The terms of trade measures the volume of imports an economy can receive per unit of exports.
How is terms of trade calculated?
(Index of export prices / index of import prices) x 100
What factors affect a countries terms of trade?
Globalisation price of invisibles (services) is less impacted than
visibles (manufactured goods).
Price elasticity of demand. The more inelastic the demand for
exports than imports, the better the terms of trade, as the country can charge higher prices for exports.
Only imports manufactured goods and only exports primary goods, the terms of trade will be worse.
An appreciation in exchange rate lead to improvement in the terms of trade, as it increases price of exports and a decrease in the price of imports.
Protectionist measure, the terms of trade will improve because imports are restricted.
What is the Prebisch-Singr hypothesis?
There will be a long run decline in the terms of trade for countries that depend on natural resource exports.
Exports (natural resources, primary commodities) are income inelastic.
Developing countries demand relatively elastic goods, manufactured goods.
What are the impacts in a countries terms of trade?
Improving ToT: Economy can import more goods per unit of export. Reduced cost-push inflation Improve standards of living However worsens balance of payments.
Worsening ToT:
For every import, the country has to export more.
Technology more expensive, lower productivity.
Lead to falling living standards.
Harder to pay debt
What is a free trade area and given an example?
This is where countries agree to trade goods with other members without
protectionist barriers.
Examples:
- NAFTA (North American Free Trade Agreement)
- EFTA (European Free Trade Association)
What is a customs union and given an example?
Countries in a customs union have established a common trade policy with the rest of the world.
Examples: EU
What is a common market and given an example?
This establishes free trade in goods and services, a common external tariff and
allows free movement of capital and labour across borders.
Example: EU
What is a monetary union and given an example?
Members of a monetary union share the same currency. This is more economically integrated than a customs union and free trade area.
Example: Eurozone
What are the requirements to join the Euro?
budget deficits cannot exceed 3% of GDP
Gross National Debt has to be below 6% of GDP
Inflation has to be below 1.5% of the three lowest inflation countries
The average government bond yield has to be below 2% of the yield of the
countries with the lowest interest rates.
What are the costs and benefits of regional trade agreements? (Trade creation and trade diversion)
Countries might stop important from a cheaper producer and start trading with a country inside the trading bloc. Protectionist measures are often placed on countries outside the trading bloc
What are the costs and benefits of regional trade agreements? (Reduced transaction costs)
Since there are no barriers to trade or no border controls, it is cheaper and simpler to trade.
What are the costs and benefits of regional trade agreements? (Economies of scale)
Firms can take advantage of a larger potential market in which to trade.
What are the costs and benefits of regional trade agreements? (enhanced competition)
Firms operate in a more competitive market, become more efficient and there is a better allocation of resources.
LR: dynamic efficient
What are the costs and benefits of regional trade agreements? (migration)
By being a member of a Customs Union, the supply of labour is increased, which could help fill labour shortages.
However, this might mean some countries lose their best workers.
What is the role of the WTO?
The WTO promotes world trade by reducing trade barriers and policing existing
agreements.
It settles trade disputes.
Those who break the rules face trade sanctions.
In addition to trade in goods, the WTO covers the trade in services and
intellectual property rights.
What are the possible conflicts between regional trade agreements and the WTO?
Trading blocs might distort world trade.
There could be an inefficient allocation of resources.
Conflicts between blocs could lead to a rise in protectionism.
The WTO is too powerful, or that it ignores the problems of developing countries.
Setting up a customs union or a free trade area could be seen to violate the WTO’s principle
of having all trading partners treated equally
What are the reasons for restricting free trade?
Reduce trade deficit.
Protection of infant industries.
Correct market failure.
Protect domestic jobs.
Retaliation against trade barriers imposed by other countries.
What is a protectionist measure?
Protectionism is the act of guarding a country’s industries from foreign competition, by imposing restrictions on free trade.
What is a tariff and how does it work?
Tariffs are taxes on imports to a country.
Leads to retaliation, exports may decrease.
Quantity demanded of domestic goods increases.
Higher prices for consumers.
What is a quota and how does it work?
A quota limits the quantity of a foreign produced good that is sold on the domestic market.
Leads to a rise in the price of the good for domestic consumers, so they become worse off.
What are subsidies to domestic producers and how does it work?
This makes domestic goods relatively cheap compared to imports.
It encourages domestic
production to increase and the average price falls.
However, it depends how the subsidy is spent.
What are subsidies to domestic producers and how does it work?
This makes domestic goods relatively cheap compared to imports.
It encourages domestic
production to increase and the average price falls.
However, it depends how the subsidy is spent.
What are examples of non-tariff barriers?
Voluntary export restraints
Embargoes
Excessive administrative burdens
What are voluntary export restraints and how does it work?
Voluntary export restraints (VERs)
When two countries make an agreement to limit the volume of exports to one
another over a period of time.
What are voluntary export restraints and how does it work?
Voluntary export restraints (VERs)
When two countries make an agreement to limit the volume of exports to one
another over a period of time.
What are embargoes and how do they work?
This is the complete ban on trade with a particular country.
It is usually politically motivated.
What are excessive administrative burdens and how do they work?
Excessive administration increases the cost of trading, and hence discourages imports.
Harmful for developing countries which are unable to access these markets.
What is the impact of protectionist policies on consumers, producers,
governments, living standards and equality?
Protectionism could distort the market and lead to loss of allocative efficiency.
Consumers face higher prices and less variety.
Imposes an extra cost on exporters, which could lower output and damage the economy.
Tariffs are regressive and are most damaging to those on low and fixed incomes.
Retaliation
What is an export?
Exports are goods and services sold to foreign countries, and are positive in the balance of payments.
This is because they are an inflow of money.
What is an import?
Imports are goods and services bought from foreign countries, and they are negative on the balance of payments.
They are an outflow of money.
What is the balance of payments?
The balance of payments is a record of all financial transactions made between
consumers, firms and the government from one country with other countries.
What is the current account?
This includes all economic transactions between countries.
Imports
Exports
Income
Transfer payments
What are the capital and financial account?
Capital transfers involve transfers of the ownership of fixed assets.
The financial
account involves investment.
What are the causes of deficits and surpluses on the current account?
Appreciation of the currency
Economic growth
More competitive.
Industrialisation
Membrane of trade union (fees)
What are the measures to reduce the imbalance on the current account?
Increased income tax. Decrease imports, however will impact domestic growth.
Gov reduced spending, reducing AD leading to less imports.
Fiscal policy in SR but not in LR.
Taxes imposed on trading partners, made lead to retaliation.
Green taxes, less competitive.
Bank may lower interest rates to cause depreciation. However, it is hard to control the supply of money in reality.
Supply-side policies could help increase productivity. Increase FDI.
Provide subsidies to some industries
What is an exchange rate?
The weight of one currency relative to another.
What is a floating exchange rate and draw a graph to represent this
The value of the exchange rate in a floating system is determined by the forces of supply and demand.
What is a fixed exchange rate and draw a graph to represent this
A fixed exchange rate has a value determined by the government compared to other currencies.
What is a managed exchange rate?
Managed exchange rate systems combine the characteristics of fixed and floating exchange
rate systems.
The currency fluctuates but does not float freely on the free market.
What is revaluation?
This is when the currency’s value is adjusted relative to a baseline, such as the
price of gold, another currency or wage rates.
What is appreciation?
When the value of a currency increases against another currency.
What is devaluation?
This is when the value of a currency is officially lowered in a fixed exchange rate system.
What is depreciation?
When the value of a currency falls relative to another currency, in a floating exchange rate system.
How do inflation rates affect floating exchange rates?
A lower inflation rate means exports are relatively more competitive.
This increases
demand for the currency.
This causes the currency to appreciate.
How does speculation affect floating exchange rates?
If speculators think a currency will appreciate in the future, demand will increase in the present
They believe a profit can be made by selling the currency in the future.
Increase value.
How do other countries affect floating exchange rates?
If markets are concerned about major economies the currency might rise.
How do government finances affect floating exchange rates?
A government with a high level of debt is at risk of defaulting.
Could cause the
currency to depreciate as investors have low confidence.
How does the BoP affect floating exchange rates?
When the value of imports exceeds exports, there is a current account deficit.
Countries which struggle to finance this have currency which will depreciate.
How does international competitiveness affect floating exchange rates?
An increase in competitiveness increases demand for exports, which increases demand for the currency.
This causes an appreciation of the currency.
What is the affect of government intervention though interest rates on currency markets.
An increase in interest rates, relative to other countries, makes it more attractive to invest funds in the country because the rate of return on investment is higher.
This increases demand for the currency, causing an appreciation. This is known as hot
money.
What is the affect of government intervention though QE on currency markets.
Has inflationary effects since it increases the money supply, and it can reduce the value of the currency.
What is the affect of government intervention though foreign currency transactions on currency markets.
It involves buying and selling foreign currency to manipulate the domestic currency.
What is competitive devulation?
A devalued currency makes exports cheaper and imports more expensive.
What are the effects of competitive devulation?
Increased economic growth, increase demand pull inflation from increase in AD.
Current account improves.
Plan investments as they know it will not be affected by harsh fluctuations.
However, costly and difficult for government to hold large reserves of foreign currency.
Depends on PED of exports and imports
What is the Marshall Lerner condition?
The Marshall-Lerner condition states that a devaluation in a currency only improves the balance of trade if the PEDx + PEDm is greater than or equal to 1.
Draw and explain the J curve
The J-curve effect occurs when a currency is devalued.
There is a time lag inin changing the volume of
exports and imports.
This could be due to trade contracts and the price inelasticity of demand for imports in the short run, whilst consumers search for alternatives.
In the long run, consumers might start purchasing domestic products,
What is the impact of a changing exchange rate on economic growth and employment?
Exchange rate affects AD because they affect the price of exports and imports.
If exchange rate appreciated, AD falls as imports become cheaper and exports become more expensive.
A weaker exchange rate may create jobs due to increased domestic demand.
What is the impact of a changing exchange rate on rate of inflation?
A depreciation in the exchange rate is likely to be inflationary due to the increase in the price of imported raw materials.
What is the impact of a changing exchange rate on FDI?
FDI is the flow of capital from one country to another, in order to gain a lasting
interest in an enterprise in the foreign country.
A depreciation in the currency means the country’s wages and production costs have fallen relative to other countries. This makes the country more internationally competitive and it is likely to attract more FDI.
What is international competitiveness?
The ability of a nation to compete successfully overseas and sustain improvements in real output and living standards.
How does relative unit labour cost affect international competitiveness?
The unit labour cost is how much labour costs per unit of output.
The cheaper the unit labour cost the more competitive.
However in niche markets quality is also important.
How does relative export prices affect international competitiveness?
This is the ratio of one country’s export prices relative to another country.
The lower the relative export price, the more competitive the
country.
How does the ability to attract FDI affect international competitiveness?
If a country can attract more FDI, it increases their productive capacity.
How does the ability to produce or attract entrepreneurs affect international competitiveness?
Entrepreneurs help develop new ideas and stimulate innovation.
How does the ability to attract (skilled) labour from abroad affect international competitiveness?
This might fill a skills gap in and improves the
quality of the labour force.
How does quantity and quality of skills possessed by a nation’s workers affect international competitiveness?
This refers to the skills of human capital. If there are limited skills, the economy
cannot expand its productive potential.
The more skilled the workforce, the more
productive it is.
How does flexibility of labour affect international competitiveness?
If the labour market is flexible and geographically or occupationally mobile, it can better respond to economic shocks and changes in demand or supply, which can help improve competitiveness.
How does economic stability affect international competitiveness?
If inflation is low and stables, firms are more able to plan their investment and
spending, because they know what future prices will be.
How does tax policies affect international competitiveness?
A lower tax rate provides an incentive to earn more, since consumers and firms
know they will keep more of their income.
How does regulation affect international competitiveness?
Excessive regulation (red tape) can make it hard for firms to invest, and it could raise their average costs of production.
How does rate of innovation affect international competitiveness?
This is calculated by the proportion of GDP invested in new capital.
More advanced technology that can
help them become more competitive. It could increase the quality of the goods and
services produced.
What are the benefits of being internationally competitive?
If a country becomes more competitive they can gain a reputation for their exports, which might make them more price inelastic.
By operating in a competitive market, firms can reach out to more consumers.
Gain economies of scale, which can help lower its average costs of production.
What are the problems of being internationally competitive?
The economic importance of education and health spending could be considered.
Being innovative is not always successful, and it could lead to funds being wasted.
A lower tax rate might mean the government receives fewer tax receipts.
If firms are operating in a competitive environment, infant industries might find it
hard to compete.
If jobs are offshored, the domestic country might face job losses and structural
unemployment.
What is absolute poverty?
Absolute poverty is defined as living below subsistence. This means that the person is unable to meet their basic needs of food, clean water, sanitation, health, shelter and education.
World Bank categorises this as living below $1.25 a day.
What is relative povery?
Relative poverty is measured by comparison to the average in the country.
In the UK, those
with below 60% of the median income are considered to be in relative poverty.
What are the causes of absolute and relative poverty?
Inequality in wages or unemployment.
Welfare payments
Taxes
Disease, malnutrition and other health problems.
Wars and conflicts.
Corruption and political oppression.
Natural disasters.
What is wealth?
Wealth is defined as a stock of assets, such as a house, shares, land, cars and savings.
What is income?
Income is money received on a regular basis. It could be from a job, welfare payments, interest or dividends.
Draw a Lorenz curve?
What does it show?
The Lorenz curve measures the distribution of income and wealth in a country.
The line of perfect equality shows the distribution of income when the richest x% of the population owns x% of the cumulative income.
How is the Gini coefficient calculated and what do the values represent?
A / (A+B)
A value of 0 indicates perfect equality, so everyone has the same income and wealth.
A value of 1 is perfect inequality
What are the causes for income and wealth inequality?
Inequality in wages (skill gap, age, gender, race)
Welfare payments and taxes
Unemployment
UK tax system
Inequality between countries
What is the Kuznets hypothesis?
Kuznets hypothesis states that as society moves from agriculture to industry, so it
develops, inequality within society increases, since the wages of industrial workers
rises faster than farmers.
Then, wealth is redistributed through government transfers and education.
What is the significant of capitalism for inequaltiy?
Entrepreneurs take risks and are driven by the profit motive. Profits are a reward to take risks. Therefore, inequality is essential to encourage
entrepreneurs to take risks
Inequality motivates workers
Capitalism leads to monopoly power.
Inheritance is passed down generations, which means wealth is often concentrated
in the hands of a few families.
There can be income redistribution and wage equality through government
intervention.
State education
What is the human development index and what does it measure?
The components of HDI are education, life expectancy and standard of living,
measured by real GNI at purchasing power parity (PPP) per capita.
It measures economic and social welfare of countries over time.
A value close to 1 is indicative of a high level of economic development. A value close to 0 suggests a low level of development.
What are the advantages of using HDI?
It provides a much broader comparison between countries than GDP does.
Education and health are important development factors to consider, and it can
provide information about the country’s infrastructure and opportunities.
What are the advantages of using HDI?
It provides a much broader comparison between countries than GDP does.
Education and health are important development factors to consider, and it can
provide information about the country’s infrastructure and opportunities.
HDI does allow for comparisons between countries to be made
What are the disadvantages of using HDI?
Does not consider freedom
Does not take into account environment
Does not consider distribution of income
What is the human poverty index (HPI)?
Human Poverty Index (HPI): measures life expectancy, education and the ability of
citizens to meet basic needs.
What is HPI-1?
US=sed in developing countries
longevity part: probability of living to the age of 40.
Education: adult literacy rate.
Percentage of underweight children
Percentage of people not using improved water sources.
What is HPI-2?
Used for developed countries
Age: the probability of not surviving to at least the age of 60 is used.
The percentage of adults which do not have literacy skills
Poverty is calculated by those living below the poverty line. This is below 50% of median income
What is the gender related development index (GDI)?
Measures the relative inequality between
men and women. It combines HDI with a consideration of gender.
What is primary product dependency?
Primary products are raw materials in industries such as agriculture, mining and
forestry.
A fall in the price leads to a fall in export incomes, which can make it hard to fund
their infrastructure and education.
Moreover, relying on primary products is not necessarily sustainable, since they could be over extracted and run out.
What is the Harrod-Domar model?
The Harrod-Domar model states that investment, saving and technological change are required in an economy for economic growth.
The rate of growth is calculated by the savings ratio / capital output ratio in the Harrod-Domar model.
What are the limitations to the Harrod Domar model?
There is a low marginal propensity to save in
some countries, or that there might be a poor financial system.
Inefficiency in the workforce.
The paradox of thrift could be considered. An increase in savings could lead to an increase in investment. However, an increase in savings means there is a
reduction in spending, which leads to a fall AD.
What factors affect growth and development?
Foreign currency cap
Capital flight: This is when capital and money leave the economy through investment in foreign
economies.
Demographic factors
Debt
Assess to credit and banking
Infrasture
Education/skills
Absence of property rights
Corruption, poor governance
What is a market orientated strategy for growth and development?
These are measures which make the economy more free, with minimum
government intervention.
What are examples of market orientated strategies?
Trade liberalisation
Promotion of FDI
Removal of government subsidies.
Floating exchange rate systems
Microfinane schemes
Privatisation
What is are interventionist strategies?
The government intervenes in the market to try and influence growth and
development using interventionist strategies.
What are examples of interventionist strategies?
Development of human capital
Protectionism
Managed exchange rates
Infrastructure development
Promoting joint ventures with global companies.
Buffer stock schemes.
What are other stategies that can be used to increase growth and development?
Industrialisation
Development of tourism
Development of primary industries
Fair trade schemes
Aid
Debt relief
What is the role of the World Bank>
The World Bank can loan funds to member countries, and its aim is to
promote economic and social progress by raising productivity and reducing
poverty.
Provides microcredit, supporting education, and helping the rebuilding of countries after earthquakes
What is the role of the international monetary fund (IMF)
The IMF aims to promote monetary cooperation between nations, and
monetary problems can be consulted in the institution.
Help free trade globally
Promotes exchange rate stability.
What is the Lewis model?
The Lewis model is an explanation of how a developing country which
focuses on agriculture could move towards manufacturing.
It is based on the assumption that in agriculture, there is a surplus of
unproductive labour in developing economies. The model assumes that in the
manufacturing sector, wages are fixed. Workers from agriculture are
attracted to the higher wages in the manufacturing sector.
What are the roles of a financial markets?
To facilitate saving
To lend to businesses and individuals
To facilitate the exchange of goods and services
To provide forward markets in currencies and commodities.
To provide a market for equities.
How does asymmetric information lead to market failure in the financial sector?
Before crash, asset prices were high, a boom.
There were risky bank loads and mortgages. The borrowers had poor credit histories.
There was asymmetric information since banks were not aware of how risky the loans were
How does externalities lead to market failure in the financial sector?
A pecuniary externalities leads to an inefficient allocation in the market.
How do moral hazards lead to market failure in the financial sector?
A moral hazard is a situation where there is a risk that the borrower does things that
the lender would not deem desirable.
How does speculation and market bubbles lead to market failure in the financial sector?
A market bubble occurs when the price of an asset is predicted to rise significantly.
The bubble then ‘bursts’ when the price steeply and
suddenly falls to its ordinary level. This causes panic and investors try and sell their
assets.
How does market rigging lead to market failure in the financial sector?
This is the act of firms coming together to interfere in a market, with the intention to stop it working as it is supposed to, so that the firms can gain an unfair advantage.
What is a central bank?
The central bank manages the currency, money supply and interest rates in an
economy.
How do central banks implement monetary policy>
The central bank takes action to influence the manipulation of interest rates, the supply of money and credit, and the exchange rate.
What are the roles of a central bank?
Regulation of the banking industry
Banker to the banks
Banker to the government
What is crowding out?
The government borrows money from the financial sector meaning the finial sector had fewer funds.
What is a proportional tax?
A proportional tax has a fixed rate for all tax payers, regardless of income.
What is a progressive tax?
A progressive tax has an increase in the average rate of tax as income increases. As income increases, the proportion of income taxed increases.
What is a regressive tax?
A regressive tax does not relate to income, but means those on lowest incomes have a higher average rate of tax.
What is a automatic stabiliser?
Policies which offset fluctuations in the economy.
These include transfer payments and taxes.
They are triggered without
government intervention
What are discretionary fiscal policys
Discretionary fiscal policy is a policy which is implemented through one-off policy changes.
Discretionary fiscal policy involves deliberate changes in government expenditure and taxes with the intention of influencing
aggregate demand.
What is structural deficts
This is a deficit which is due to an imbalance in the revenue and expenditure of the government, so it exists at every point in the business cycle.
What is a cyclical deficit?
This is a temporary deficit, which is related to the business cycle.
A deficit might occur during recessions, when governments increase spending to stimulate the
economy
What are the measures to reduce fiscal deficits and national debts.
Austerity measures: less government spending and higher taxes. However lead to lower economic growth and discourage working.
Economic growth.
Can issue bonds. Works in short run, in long run had to pay back investors.
Default.
What are the measures to reduce poverty and inequality?
Inheritance tax.
Sustained growth.
Employ progressive taxes.
NMW
Education
What are the effects of changes in exchange rates and the supply of money?
Use monetary policy to stimulate economy and raise gov revenue.
QE
Low intrest rates
What measures can be used to increase international competitiveness?
Cheaper relative unit labour costs.
Niche market
Manipulation of currency.
Lower corporation tax.
What measures can be put in place to control global companies?
Regulation of transfer pricing: transactions between companies in the same multinational group form up a significant
proportion of global trade. The price of these transactions is known as transfer pricing. transnational companies exploit these rules so they can reduce the amount of
tax they have to pay
What is the limits to government ability to control global companies?
The tax rules are complex and difficult to apply and regulate. There could be costs to HMRC to challenge firms which do not declare their profits truthfully.
What are the problems facing policy makers?
Inaccurate information, risks and uncertainties, inability to control external shocks.
