Essay Q Flashcards
Explain the main problems for an econ of having a large positive output gap
demand-pull inflation as too much money is chasing too few goods
o cost-push inflation due to labour shortages
o wage-price spirals
o rising imports as consumption is rising and possible leakages rise
o falling exports if inflationary pressure occurs
o an increase in the current account deficit
o unsustainable asset price rises
o potential effects on the exchange rate
What to consider when discussing budget deficit
Sturctural or cyclical
Arguments why a currnet account defiifct may need to be reduced
it could indicate lack of productivity
o it could cause depreciation of currency
o possible risk of capital flight
o it could cause problems for a country’s reserves
o a surplus on the financial section of the balance of payments increasing international
indebtedness
o deflationary pressure
o it could indicate structural weaknesses
o effects on jobs such as structural unemployment
Method to calculate the rate of inflation from index numbers
Minus index no (y2) from previous index no (year before)
Divide that number by origional number 9y1) x 100
How do subsidies improve competitive advantae
Lower average costs therefore firms lower prices where demand is elastic, increasing competition adv, thus sales, thus boost exports
Or
Subsidies rd increase innovation/quality and thus gain com adv where demand less price sensitive in international markets boost exports
Which industries should be targetted by protectionist measures in developing country
Reduce in Industries unlikely to have comparative adv to give consumers access to cheaper ipmorts and thus benefitting from the income effect
while identifying those industries that have comparative adv to exploit export led growth
For 10 markers p3
3x points explain and judgement with limitations
Need overall conc
National living wage 25 marker
May help imporve living standards
Exports
Real wage unemp
Nat living wage- improve living standars
Reduce those living in poverty yet are employed, poverty defined as having an income les sthan 60% nat mediam
Poor quality ofl life- individ less disposable income to spend on gs from which derive utility and pleasure
Alieviate ppressur eon gov welfare spnening, enabling gov to spend on imporving capacity of econ
Increased spending on education create silled workforce- innovative and productive
May reduce unemp trap and replacement ratio- alongside cuts in beneifts- work more financially rewarding
Exports- nlw
Increase in prices- cost push inflation,
Increase cost british exports less comp
Esp with weak productivity growth
However- unlikkely to be the case as exports high value added- workers relatively skilled paid more than min wage
May impact smaller businesses
Employment- nlw
Increase unemp real wage unemp with excess supply
Shift with greater automation- technological unemp= labour to capital increasing productivity
But Obr predicted this would lead to 60,000 unemp in 2020- small number of 1.4mill
Depends on elasticity for demand- currently inelastic even in less skiled industries such as retail hospitality- we are service bassed econ
Boost emp due to increased ad with higher wages
Monospony power many sectors - min wage boost emp and reduce exploitation reduce welfare payments universla credit to working poor that employers such as amazon appeared to have been exploitning
Gov of sri lanka should cut its spending to reduce its debt
No
-cyclical v structural
-has financed merit goods- which should not be cut
Y
-accelerating inflation- undermine confidence- finance spneding through print more money
-areas to cut spending
-increase taxation
Context nat debt
As a result of covid, nat debt in many developed and less developed econ rose above 100% of gdp
Danger of high gov debt
Esp less developed econ such as sir lanka
If creditors lack confidence in econ ability repay its debts and unwilling to finance futhrer loans may cause signif fall gov spending ad
Render econ bankrupt
In order to cut debt where should cut
May fall anyway due to automatic stabilisers
-not welfare on education- damage lt econ growth
-not on healthcare,nutrition, safety net programmes could increase absolute poopverty and inequalit
-could postpone infrasturcture- or possibly aim to attract foriegn aid
-could cut military spending
or examples gov failure or waste due to inefficiney- excess ciil servants- spending reduced without damaging growth
Cut debt through increasing taxes
Higher ncome groups with bigger share nat income, beneffitted strong growth
Tax riases careful avoid laffer curve- avoidance and brain drain
Indirect taxes raised on demerit goods- cigarettes and alcohol hypothecated cover healthcare costs
Raise tourism taxes and excise duties on luxury goods sold to tourists- sri lanka luxury and so inelastic destination
Limiting tourism using pigouvian taxes could limit pollution and neg externlaitis whilst raising tax rev
Sucessful in luxury destinations such as glapagos islands
Global slowdown
Slowing increase in gdp
Less than 3% grothh
As pop may increase morme than increase gdpp
Uk mahor trading partners
Eu
Where would a decrease in exports affect
In manufacturing areas such as north and midleands
May lead to negative multiplier effect- contraction output less emp, less consumer spending less ad cycle cont
Exports in uk strnegth
6th bigest world
Impmact of decrease exports on investment
Decrease exports
Decrease gdp
Lead to decrease investment accelerator
When does crowding out effect not happen
When in recession or neg output gap
Why do exporters produce less in global recession
Produce less because lss demand in recession
Impact of sustained global slowdown on living standards
Decreased demand birtish exports- increase emp as cut output- lower gov beneifts, less disposable income, purchaisnggoods and servcies
Fall in exports may lead to negative multipleier effect esp manufacturing regions of uk
Diagram neg output gap
Reduction in investment- accelerator- less comp, worse living standards as shut
May lead to reduction in demand imports, as whilst in theroy cheaper imports from less grotwh oevrseas, depreciaition of pound 9iin source) makes more expesnive, reducing demand income elasticity imports such as foirgen holidays
Impact of min wage on exports
In therry increase cost of production less comp
But less likley as uk most likely high value added or less lab internsive manufacuring exoprts
But for smaller firms are liekly to lack iin competition
What does real wage unemployment rely on
Dpend if above equlibirum
Elastciity supply and demand of labour- both of which relatively inelastic due to labour shortage
Esp in skilled but also unskilled as since brexit- less wokrers and if need overseas firmes help support visa
Thus less slikely to lead to real wage unemp
Also if in monopsony labour market or emp monopsony employer then real wage unemp less likely as higher employment levels and wages accepted
Who sets min wage
Independent boyd
Low pay commison
Work to not set a t levels create unemp
History of min wage
Major remove
New labour inrtoduce and gradually introduce
Osbourne nlw
History min wage- major
Real wage unemp exploiation
Decrease wgaes, emp not increase
Thus disproves negative impact of min wage
Min wage under new labour
Reintroduced as clear min wage does not increase unemp
Cautious so set low as close to equilibrium level but diff deterine what level this is
Osbourne min wage
Inrtoduced nlw
Evidence min wages below equlibrium wages
Moonopsonist asda amaxion next pay below as could
And would encourage indivdi to claim working tax credits- thus part of austerity plan
Grants for amazon
Set up in areas high unemp eg wales scot
Has unemp recently risen with signif min wage ncrease
Only 3.8 to 4.2 and may be linked to other supply side factors
When answering q 4 marker on nairu calculatig
Compare when known recessions
Suggest how much fallen by
Term for sickness benefits
Personal indpendence payments
Can a recession ever be avoided
No just mitigated and impact reduced
Australia up until 2020 saw no recession for 30y
Montetary policy to prevent recession
More effective to fine tine the con to maintain ad and keep econ at its nat rate output
But monetary policy cannot prevent demand side and supply side shocks that could cause recessions
But stop go cycles of 50-70s suggest fiscl policy less effective to fine time econ due to greater time lags
In what countires is greater risk of brain drain
Ledcs and medcs with medical staff teachers engineers
Tourism tax
Whilst may not beneift everyone
Limit pollusion and negative externalities whilst also raising tax rev
Demand may be inelatsic for lucyr areas
Successful in galapagos islands
Uk productibvity gap
25% less than usa
Why rapid econ growth not always result in rapid econ development
Meaning of both
Measuremnt econ development- hdi
Unequally distributed- qatar- oil rich, benefits flow to those in oil industry
China income inequality gini 0.57, thus poverty not allieveiated as much
Depends where growth seen- if in merit goods- education and healthcare- ppf but education and healthcare against other goods- flatline educational nd healthcare whilts othergoods increase
Neg externalities- air pollution
Eval on the use of ir to reduce inflation
Cost push or demand pull
Depend on how far above target and how long above target
Accuracy of economic forecasting- if overeestimate may increase bank rate too high and thus damaging gdp
Time lags - 18-24months by then economic conditions may have changed
The use of increasing base rate may reduce expecttations of inflation lower wage settlements lower inflation
Unemp
Those of working age who are not in a job but are actively seeking one at oing wag erate
Factors which may effect extent a rising tax bruden
Position econ cycle
Multiplier effect
Depends if gov spendingalso increasing
Factors of production internationally mobile- eg firms and individ (laffer curve)
How desirable uk is foriegners- eg flexible laboru market
How should welfare reform be done
Cuts to welfare oatments to fund tax cuts
Porblems iwth cutting corp tax
Short termism in financial markets may encourage private sector firms to pay higher dividends to shareholders rather than invest rd
Thus keynsian would invest directly in road and rail or subsidies to indusrteis for rd
How is fiscal drag happening more
Frozen tax levels
Tax brackets
12570- 0
12571-50270- 20
50271-125140- 40
125140-45
Impact o fni changes
Cut 2%
Compensate for fiscal drag for middle income workers not pesnioners
Lower paid and mensioners are worse off
Regressive policy
In ledc dfinition
Defne
And state how know hdi or gdp
Explaining arguments in favour of budget surplus
reduction of national debt
o reducing the burden on future generations
o the possible improvements to government credit ratings and the effect on
coupon rates and debt interest
o the reduction of crowding out
o the possible reduction in inflation
When may borrwoiing be benefiial and chepa
When coupon rates are low
Why falling unemp may imrpove living standards
Increased incomes and consumption possibilitis
Allowing individ to have more disposable icnoem to spend on leisure
Motivational and possible health effects
Social inetraction
Increased tax rev allow gov to cont spenidng without accumulating debt
How falling unemp may not imrpove living standards
Gig econ and zero hours contracts- job secuirty
Type of work and bargianing power of workers may detemrine relative winners and losers from falling unemp
Inflationalry efects- worsen those on fized incomes or low bargainng power
Inequality may get worse particularly for those not in work
Cost of living increases
Reduced unemp may indicate increased output which may indicate more pollution
Eval effects of trade deals on uks macroecon performance
Trade creation
Trade diversion
Depends which countries- size , uk net exporter or importer
Comp may spur improcements in productivity
Etv to improve living standards of citizens gov across world should prioritise achieving econ growth
Econ growth lead improvenent living standards
Worsen living stadrds
Achieve sr and lr econ growth
Depends on country -h ow welel developed and thus how much further can go
Stage of econ cycle
Explain why econ growth may lead to worsening living standards
inflation and its effects on individuals such as those on fixed incomes or those with low wage-
bargaining power
o the negative externalities of production such as pollution or deforestation
o the using up of scarce resources
o inequality
o stress/loss of leisure time
Explain why eocn growth may lead to imrpoved living standards
o increased employment and disposable incomes
o more consumption possibilities
o improved public services and merit good provision
o a reduction in absolute poverty
Why a suply of currency may increase
a rise in imports
o a rise in FDI going abroad
o a rise in tourism to another country
o a fall in interest rates leading to a rise in hot money flows out of a country
o speculation
When assessing depreciation of currency
Econ growth- ad fdi
Unemp
Current account bop
Inflation
Marshall lerner ocndition
Lt
Labour flexibility
Easy to alter quantity and structure of workforce
All things being equal
Ceteris paribus
Consumer sercives
Provison of something non physical that yields a benefit
Causes of increasing uk exports
world income uyp
More innovation
Depreciation of currency
Uk incomes fall due to recession
Export led growth
Import substitution
When increasing imports at sacrifice of domestic goods
Factors which may affect consumption and spending
Inocme
Wealth effect
Inflation
Rate of interest
Expectations
Keynsian graph
Horizontal low levels output
Positively sloped as econ nears full capcaity
Verticle when at full capacity
Characteristics of lab flexibility
hours worked
-ease of hiring and firing
-st emp contracts- 6 month or zero hour
-performance related pay or regionalisation of pay
-locational felxibility
Factors which cause invetsment to change
Interest rate
Capacity utilised
Business expectations
Tech innovation
Gov policies
Fdi
Absolute adv
Uncontested superiority of a country r business to produce a particular good betster
Eg uk law good higher education
Comparative adv
Country can rpoduce gs withh lower opp cost than other counrties
Ricardo
Benefits of free trade
International specialisation leads to increasing output of gs- promoting econ growth and increasing living standards- comp adv
Greater variety gs- more choice for consumers- exotic fruits
Ecinomic growth0 exports to foriegn markets increase soutput more jobs and higher income- exports net inkection, positive multiplier
Home firms exposed to more comp- lower prices, greater market orientation , technical efficiency, innoation
Technology transfer- spread pf omporved technologyu
Home firms may find cheapoer input savings aborad- improt raw materials, compoet parts
Income effect of cheaper imports for consuemrs- eg cheaper food, clothing electrical goods- spend mroe entertainment or lsiere domestically
As countries trade more and become mro einterdependent to avoid war
Disadv free trade
Job losses- esp labour inntensive manufactures indisteis in developed countru- against biden semi conductor, trump steel and solar panels
Greater international interpdependence- countries can become dependent ie food fuel- make bvulberable in war or cnoflict- russian gas
Interntional specialisation can also make vulnerable should demand or price for priduct fall- if specicalise one thing- kenya tea and coffe, agricultural when crop failure
Free trade not always level playing field esp with exploitation or dumping (prodcue a lot excess sell at cheap price- eu accused japan dumping cheaper printers on euprean markey, china steel throgh not enviornmental way
High exchange rate may also disadv higher effcicent production
Increased co2 emissons from transportation
Exploitation of labour in countries where not monitored as closely
Diff ruglate wto- self interest ect
Opeb econ impact on consumer and producer surplus
Welfare tranfer from producer to consumer- b welfare gain for consumers without domestic
Gain consumer grester producer
Sturctural econ change, ie mroe to work as deliery drivers
Fall in price- prdocuer surplus for domestic lower
Consumers win and domestic producer lose
Net welfare gain c
Causes globalisation
More trade gs
Trade liberalisation and greadual removal of barriers to trade
Increased number multinationals companies
Increased foriegn ownership of firms
Eilimination of exchange controls
Innovation in info and communication technology
Reasons for multinat status
Locations close to target markets- avoid transport costs, greater market orientation
Locate close to sources of raw materials /corperations- eg oil mining
Take advantage of low cost production facilities or geographical characteristics- flat land
Take advantage of cheap labour- dyson malaysia
Take advantage of skilled labour- pharma near uni cambridge, recruit from uni
Low corporation tax in host country- increase retained profit- ireland alogabet
Expanding markets/prodction may lead to econ of scale, decreasing ac, decrease unit cost, decrease prices, increase profit margins
Longer term survival of company due to spread of markets- spreading risk may maintain when recession in one country
By setting up prodcution in target market, transport costs, import tarffis and quotas may be avoided- nissan in uk avoid eu external tarrif
Benefits multinat
Many gov forom developed and less d wish multinat as provide employment
Expirts increase injection positive multiplier
Technology transfer- multinat introduce new ideas
Train and educate local worjers- nissan ne greater standard of life than fordm engineers trained up to meet requirements, boost overall rpductivity
Direct inward investment from multinat- nissan battery plant sunderland for new electric model gov contribute
Problems multinat
Regulatory capture
Lack social responsibility
Job displacement
Trojan horse effect
Tax avoidance
Lack social responsiblity multinat
Double standards
May be indirectly subcontractorsor directly
Primark- exploitation of labour
Pollute enviroemnt- bp shell, oil spill in gulf of mexico
Tax avoidance via transfer polucy- anaxon
Regulatory capture multinat
Multinat may pressure gov to legilsate in their favor
Mondeliex internat campaign against sugar tax and more labelling
Job displacement multinat
Some multinat have no loyalty to host country and may close operations very rapidly when econ climate changes
Hoover dijon fr to glasgow
Uk offer large grants and financial incentive to entice fdi yet some opp cost- not spent on domestic firm
Trojan horse effect multinat
Over reliance on multinat by a host country displace or crowd out domestic market
Leave host econ vulenerable if multinat switch countries- ie chepaer labour
Methods of protectionism
Tarrif
Qupta
Subsidies to domestic prdocuers that export
Complex admin procedures imports
Complex or non uniform systems
Trade embargo
Boluntary export agreement
Arguments for protectionsim
All countries protect domestic industriesto some extent ie agricultire
Proetction of infant industries
Protection of sunset industries
Strategic trade theory
Proetction against dumping
Protection of empoyent against cheap labour
Strategic trade theory
Krugmen
Gov can create comp adv by nurturing strategically selected industry or econ security- justify protecting industries while company developing
Skills gained in developing it sector or energy sector may spill over (positive externalities) to help ptehr sectors
Protectionism can prevent explloitation by fair business practises
Protect strategically improtant industrie-s shipbuilding defecne
Proetct culurally important industries=- fr film industry, idnependent book shops
Against protectionsim
Welfare losses
Retaliation
Props up inefficient and omnopoly prodcuers
Protection redistributes income in favour of producer
Counter to protection for employment against cheap labour
Terms of trade
Measrying the rate of exchange of one product for another when two countries trade
Index= 100 x av index export prices/av import price index
Ricardo theory of comparative advantage explains that if country specilaise in production of gs in which have comparative adv- all countries mover own ppf and gain from trade
Import penetration
Extent to which imports have met needs of market as % of total shares
Common market
A customs union ytat also provides for rthe free movement of labour and capital across own borders
Eg european single market
Econ union
Free movement of goods, money and workers
Integrate monetary and fiscal policies (not necessarily shared currency- that is monetary union)
Trade creation
Shift in domestic econ spending from a higher cost domestic sourec to a lower cost partiner source within customs union
As a result no tarrifs in intra uiinon trade
Ie uk families get insurance from chepaer fr rather than uk sources
Impact trade creation
Increase consumer suprlys
Income effect- frees up inocme for othe rg&s- esp if domestic
Firms may benefit cheaper raw amterials compenent parts within customs union- ie western european car manufacturer can get tcheaper galss or rubber tyres from within
Trade creation should stimilate an increased intra eu trade within cutsoms union and efficient utilisation of scare resources
Gains in producer and consuemr welfare
Trade diversion
Shift in domestic consumer spending from low cost world source to eu partner source higher cost
Tarrifs mean importing expensive to
Maning more expensive, high cost producer and consumer
Welfare loss
Trade diversino likely with agirculture and processed foods
Objectives of eu
Promote free trade- consumers and frirms should purchase from most efficient supplier within eu
Specialisation increases output to higher incomes and rising living standards
Firms expand by selling to larger markets taking advantage of of econ of scale
Greater comp between firms within eu- low prices ect
Free trade should enhance allocative and productive efficiency
European single market
Common market
Free movement of factors of production- largely capital and labour
As wel as eliminating barriers to trade such as tariffs and quoteas
Removal all border controls
Goods produced witin have same technical standards- min health and safety environmental standards but less standardisation with services market
Structure of eu
Bodies inc creating european policy
Council of ministors- made yp of heads of states or their reps- unanimous decision makiing
European parliament composed elected members like hol- rubber stamp and ammend
Eu commisoners are appt bu the gov of member countires- propose policy and are responsible with carrying out once ratified by council of ministers and eu parliament
What eu comp commissoiner looks into
Collusive aggeements between suposedly independent competition organisations
Power exeryted by firms with degree monopoly power
Distortions of market resulting from gov subsisies legal restrictionas and purchasing policies
Examples of powers of eu comp comissioner
Coca cola premises in ger austria and denamrj- ability to demoniat position by making retailers stock full range of coca cola- full line forcing and offers loyalty ddiscounsts that rwuire distributers to seell less competitor products
Interbrew/inbev- producer stella artois- dominant belgian beer brew raided of allegations of practises that excluded competing beers from bars
Ba fined 6.8 million euros for operating loyalty shceme that discourage travle agents from rival airlines ickets
Fr gov chalenged over subsidies to bank credit lyonnaise
Apple fined $14bn nfor sweetheart tax deal with irish gov which eu comcluded resulted in state subsidy
Benefits brexit
Free to negotiate trade delas
No longer transfer funds to eu to subsidise farmers
Gained fishing righst
No longer eu emp legislatin
Fiinancial services sector
Own targets green poer generatiuon
Free movement lab
Free subsisdies
Beneifts brexit- negotiate trade deals
Since leaving eu singed trade benefits deals 71 countries and 1 eu
But majority simply rollover deals copying terms of when in eu
Despite free trade deal eu, signif more barrierst o trade than when uk memebr of eu and single market- complex customes forms, uk financial firms lost their ‘passport’ to trade acorss eu without restirctions
Benefits brexit- subsidies farmers
Treaty savung up 8bn - uk recived 3.5bn for farmers
Food oculd become cheaper in uk but famrers lose subsideis
Under wto rules cuountries may reduce import barriers as long as dont beneift some over others-
Yet stilll aas eu does too highe comon external tarrif on agriculture- leading to trade diversion
Costs brexit
Single market
Customes
Decrease exports
Financial services
Decrease gdp
Research projects science
Costs brexit gdp
4% fall
40bn lossu k gov tax rev
Cost brexit research projects science
Ie science
Ie horizzon european innovation programme and galieo project
Lead to brain drain and potentially damage uk econ in lt due to lack innobveation
But uk gov announce extra 15bj of dunss for uk based science projects
Discuss econ arguments for and against trade protectionsism
Intro- define protectionism, exampel tarrif quote
Benefits free trade- loss of tarrif
Krugman strategic trade theory
Retaliation
Exploitation of lab
Loa - limited protection with strategic trade throy
Econ development measured by
General improvenbt in livibg standards which reduces poverty and human suffereing
Access to resources such as food adequate healthy diet
Shelter to satisfy basic human needs
Access op human develipmet- education trianig and lisure persuists
Access decent healthcare
Sustainablity and regeneration , resource depletion falls
Policies for gortwh
Neoclassical
Comp poilicy- decrease barriers entry to makrets, dereg, brak up monopolues, privatisation of nat industry
Creating more flexible lab makret- zeroo hour contracts, dereg, easy hire and fire workers
Increase incentives work save and invest- cut tax, wlefare reform, lower corp tax incresed porofit to invest
Keynsian
Policies incease investemnt infratsurtcure- direct subsidy or provision
Increase investment education and trainig- occupational mmobility
Neoclassical growth theory
Econ growth largely determined by grotwh in lab productivity
Determined by investment in productive capciaty- firm spending on plant, machinery, comapny ect and tech development
Limitation neoclassical grotwh theroy
Does not explain how technolgical develpment may be achieved- tech rand d innevoation but neoclasicla growth theroy does not expalin how rand d and innovation may be enocuraged to rpomote real econ growth
Although planned econ soviet bloc invest heavlity cappaity anf rd post war period- not necessarily lead to sort of econ system enjoyed by usa and oehr mized eocn of western euroep- in soviet bloc not free markets and comp incentives to encourage right source of investment and rd
New growth theory
Or endegenosu gortwh theory
Policies to encourae technological innovation may promote real econ growth
Profit seeking research- comp markte to give firms incentive sto carry out right sort of rd that leads to market products adn serves and invets in uni and eductaion to encourage as much since research as possible
Openness foreign ideas- policied enocurage international trade and lab migration
Accumulation of human capital education and training
Main barrier to econ growth in less developed countries
War
Corruption and lhigh levels of crime
Poor gov and weak rule of law
Lack of contract law
Investment in infrasturcture lack
Lack investment human capitial
Capital flight
Protection proerty rights lacking
Climate change
Communal ownerhsip
Policies to promote econ growth in ledcs
Peace
Good gov and rule of law
Prudent fisal and monetary policy to maintain stable ad
Supply side policies
Approporate microecon policies
Exchange controls to limit capital fligyyht
International trade
Foriegn aid
Appropriate microecon policies to promote sustainable develpment and eocn growth in less developed eocn
Reduce or correct variations market failres that econ growth can bring about
Tax and subsidies
Ie cigarettes alcohol but could lead to smmuggling
Carbon tax on burning foissl fuels and reinvetsment renewables
Supply side policeis to promote gortwh in ledcs
Less developed eocn benefit from more interventionist supply side polcies to encourage investment in education trainng and infrastructure
Comp policy may help to encourage comp practisies yet krugman argue protectionsim for infant industries
Blance redistricbution of income and welath create incentives- high levles of inequality are incompatible with develpment and can suppress demand social mobility development of talennt essential econ growth
But high levels of tax in high income grops adn wea;thy may damage inceniyves and cause brain drain
Bop account
Records all financial dealings over peirod of time between one country and all others
Index number calcualtion
A(comapring year)/base yr x 100= index for year a
Acronym for factors imrpve internat comp
Deliciie
Dereg
Education and training
Low taxes
Infrastructure and telecommunications netwrok
Comp markets
Investment
Inflation
Exchange rates
Disinflation
Rate of inflation falling but still positive
Indexation
Automatic adjustment of items such as pensions and welfare benefits to changes in price level
Portfolio investments
Purchase of financiial assets(such as shares in overseas companies o securities issued by foreign govs) rather than physical or directy productive assets
Direct capital flows
Money flowing into a country due to purchase of company overseas (for example) or for profits repatriated from said company
Ppi
Producer price indicies
-measures changes in input and output prices of goods bought (eg. Fuel and raw materials) and sold (goods produced) by uk manufacturers
Nat income
Total income earned by countries residnet sinc income overseas investment and income earned residents overseas
Hwo to calculate nat income
Gnp- depreciation
Factors excluded from income method
transfer payments- eg. UI
-private money transfers- between individuals
-shadow economy-not registered w/ tax authority (organised crime)
-informal economy-eg. Subsistance farming and bartering
Sustainability
the ability to meet the needs and wants of the current generation, without compromising the ability of future generations to meet their needs and wants”.
Arbitrage
Baility to buy goods in cheaper country and sell them in other counrties for profit
Limitations of nat living data to compare living standard sbetween counrtes
Relative importance of non monetised econ
Excange rates
Traded and non traded goods
Current account bop uk
Consistent defiict since 1982
Financial crowding out
Increased borrowing by gov push up interest rates- needed to attravct golders of bonds issued by gov to finance extra spepnding
Higher interest rates reudce private sector borrowing ans sepdning
Cut gov spending may be better method of reducing bydget deifict
Gdp limitations measuirng living standards
not clude non-monetised informal sectors
-inflation and statistical error
-improvements in quality
-value of leisure
-negative extermalities
-distribute of GDP
-composition of GDP-what is produced
-difficult to compare GDP between diff countries
Deflation
Persistant decrease prices in econ in a year
Neg inflation
Malignant deflation
Demand side deflation
Comes with lower growth
Lt and anticipated
Ad to left
Malignant deflation- consequences
Anticipated
Delayed spending- as expected that deflation cont so goods and services bought later when expected to be cheaper- decreasing consumer spending, decreaisng ad, neg multiplier
Positive real ir
Increase cots borring, increase rela value debt- harder to servic edebt
And so increase saving
Happened with greece
Goood deflation
Supply side
Sras shift left
Increased growth
St and unexpected, not to last
Deflation beneifts
Falling prices consuemrs- income effects
Decrease input pprices for firms
Causes supply side delfation
Lower raw materials
Strong exchange rate
Eval supply side
Anticipated or not- anticipated if bad
Causes lt or st
Consequence of loss of creidt stus
Increases octs of gov borriwng in future
Caused by excessiev budget deffict
Reduce budge deifict more important to uk macroecon performance than reduce current account
Arguably yes
But depends budget deficit cyclical or stuctural
Not mutually exclusive and imporves supply side hep both
If gain fdi hhelp finance capital account and may off set any problems on trade deifict, may help budget as job creation and generate tax revenue
Benefits join currency union
stability of currency allowing for business planning
o trade creation due to reduced transaction costs
o possible benefits from increased specialisation and gains from comparative advantage
o price transparency between fellow members
o possible reduced inflation due to reduced import costs
o attracting inward investment
o protection for smaller countries from financial crisis or speculation
Cost of currency unioin
changeover costs or menu costs to firms
o the inability to have control over the instruments of monetary policy
o ‘one size fits all’ interest rates
o possibly not an optimal currency area due to cultural/language barriers
o possibly limits to fiscal policy such as the EU growth and stability pact
o no scope for a competitive devaluation
Benefist of fdi on living standards in terms of
employment
o incomes and consumption possibilities
o economic growth and GDP per capita
o multiplier/accelerator arguments
o human development/skills progression
o potential improvements in infrastructure created by MNCs
o possible health implications of increased formal, regular employment
o generating more government tax revenue which may be spent on merit/public goods without
creating debt
o crowding in arguments
Explainiing the drawbacks of fdi on living standards in terms of
exploitation of workers by MNCs
o damages to the environment caused by MNCs
o possible inflationary pressures causing the cost of living to rise
o ‘footloose’ industries causing instability in employment for example
o repatriation of profits acting as a leakage from the circular flow
Negative effects of maintaining low stable inflation
the possible trade-off with unemployment if inflation is too low
o the possible trade-off with growth if inflation is too low
o the focus on achieving low, stable inflation may impact upon certain groups more than others
for example borrowers with variable rate mortgages
Expendaiture switching polices
relative prices of exports and imports to help reduce the size of a country’s external deficit. For example - an exchange rate depreciation can improve the price competitiveness of exports and make imports more expensive when priced in a domestic currency. Import tariffs are designed to create expenditure-switching effects by making imports more expensive.
Flaoting exchange rate how corrects bop
Bop deficit- means more supply of pound to buy imports, shift supply right
Depreciates currency
Increase cost imports and exports cheaper
Correcting deffict on current acount bop asuming marshall lerner condition applies
Floating er correct bop reality
Other factors play into er
Eg uk in late 90s to early 2000s high ir as housing boom
Thus increased speculation and hot momney flows, appreicating currency despite bop defiict
