Exam preparation

Question 1

Main advantages of globalisation

Answer 1

• increased trade from areas of comparative advantage may increase welfare gains and bring lower prices
• contestability in domestic markets due to the threat of foreign firms increasing competitiveness and encouraging dynamic and allocative efficiency
• increase movement of labour can improve the productive capacity and quality of labour forces in different countries

Question 2

What should globalisation be linked to always?

Answer 2

ECONOMIC EFFICIENCY

• dynamic
• productive due to economies of scale
• allocative

Question 3

What diagrams can be used for globalisation?

Answer 3

Trade creation/ liberalisation

• show the gains in consumer surplus
• FDI so shifting AD and AS diagrams

Question 4

Main disadvantages of globalisation

Answer 4

• trade imbalances where some countries are export dependent and have big CA surpluses, whereas some are import dependent with big CA deficits
• environmental products due to resource extracting, pollution, emissions
• leads to more protectionist policies
• corporate tax avoidance, finding loopholes to avoid paying taxes in lower tax countries
• emergence of more dominant global brands which squeeze out local producers and reduce culture and diversity
• relative poverty has increased even if absolute poverty has fallen

Question 5

What is the paradox of globalisation

Answer 5

-the benefits of globalisation are uneven; there is a backlash for countries or region such as those who have seen brain drain effects as their most skilled labour leave to other countries or increased dependence on natural resources has bad environmental effects

Question 6

What issues does globalisation raise?

Answer 6

Issue of equity as well as efficiency

Question 7

Advantages of an increased budget deficit

Answer 7

• The deficit is a fiscal stimulus designed to increase GDP growth, as it is an injection and boosts AD
• can bring about positive fiscal multiplier affect, final increase in GDP bigger than government investment
• may help to prevent economy falling in to deflationary recession by making up for falls in C or I
• deficit itself may reflect increased spending on supply side policies which increases long run growth, generates more tax revenue

Question 8

Disadvantages of increased budget deficit

Answer 8

• increases long run government debt, which increases the burden on future generations who may see increased taxes
• crowding out, interest rates must be raised to encourage people to buy bonds, in return businesses can borrow less as it is more expensive
• may leave to overheating of the economy if too much investment, prompting inflation

Question 9

what does the deficit depend on?

Answer 9

Keynesian argues that fiscal policy more effective than monetary policy when liquidity trap is present

Question 10

What is a liquidity trap?

Answer 10

When low interest rates do not increase investment and borrowing, as people expect rates to rise and therefore choose to save instead

Question 11

What is crowding out?

Answer 11

when interest rates are raised to encourage the purchasing of bonds from the government, decreasing private sector investment as it costs them more due to higher interest

Question 12

How can globalisation lead to inequality??

Answer 12

• FDI into developing countries may see local labour only employed in the low skilled and low paid jobs, whilst MNCs bring their own supply of high skilled workers
• MNCs profits will flow out of the country, or may flow unevenly to top earners in the host country
• they may not pay the right amount of tax, so the government has less receipts to invest into infrastructure and raise the quality of life for the poorest in the country

Question 13

Advantages of FDI?

Answer 13

• Can help to provide employment in developing countries, training more people to a better quality, increasing the quality of human capital and shifting LRAS to the right
• more people have higher incomes, may be more savings and more consumption,, increasing AD and GNI per capita
• May be used to finance a Current account deficit
• may see external economies of scale arising, lowering the cost of local businesses in the area if MNCs arrive and make infrastructural improvements
• higher tax revenue, promotes government investment, improves quality of life if healthcare and education improve, higher HDI values and improved quality of human capital
• transferring of technology to the host country

Question 14

Disadvantages of FDI?

Answer 14

• FDI from businesses may only be concerned about making a profit in the short term, so doesn’t ensure long term employment or higher quality of life in the long term
• FDI from MNCs may be unsustainable, may include the rapid depletion of natural resources ie deforestation etc
• the host country may not get the tax revenue that they should be getting, decreasing fiscal opportunities for the country
• inflows of investment will increase the demand for the countries currency, which will see it appreciate and may make other exports less competitive
• symmetrical effect on profits, FDI inflows but profits flow back to investing country
• inequality and poor ethical standards

Question 15

evaluative points of FDI

Answer 15

• uncertain about size and extent of multiplier effects
• depends whether they pay sufficient tax rates
• how long are they planning to operate there and are they fulfilling corporate social responsibility by helping people in that country
• depends on quality and quantity of jobs created
• depends on sustainability

Question 16

Why a current account deficit could be considered harmful?

Answer 16

• if you run a Current account deficit, you are running a financial account deficit, so foreigners have an increasing claim on your assets which they could decide to be withdrawn at any time
• if it is being financed by FDI, it may increase the value of your currency and make you less competitive, worsening the current account deficit in the long term
• may imply you are relying on consumer spending and are becoming uncompetitive, leading to lower export growth and therefore lower AD as your trade balance increasingly becomes negative

Question 17

Why a current account surplus can be negative?

Answer 17

• A country may have a surplus due to weak domestic demand which may limit their growth and potential
• they may be exporting a lot but not importing much, may lead to less choice and lower quality of life, especially if imports are expensive because of the choice to keep exchange rates low

Question 18

Policies to influence current account balance in the short run?

Answer 18

• exchange rate adjustment
• interest rate adjustment
• trade restrictions
• deflationary fiscal and monetary policy to reduce the Amount of imports being bought

Question 19

Policies to influence current account balance in the long run?

Answer 19

-Anything that will make the country more competitive in the long run ie shift LRAS to the right
-increased productivity, deregulation, tax breaks, subsidies
(time lag and opportunity cost)
-better quality education and healthcare, takes time to do

Question 20

Advantages and disadvantages of fixed exchange rates?

Answer 20

ADV

• provides greater certainty for investors and buyers, allowing costs to be better planned for in the future
• less speculation means less fluctuations in competitiveness
• incentivises domestic firms to keep their costs down to remain Internationally competitive
• improves inflation, more responsive government control over the price level

DIS ADV

• loss of monetary policy to control other objectives because it is being used to purely maintain the inflation rate
• can be fragile and prone to attacks
• hard to set the right target which allows all economic objectives to be obtained, the importance of these objectives may change with the state of the economy
• devaluation can lead to cost push inflation

Question 21

Advantages and disadvantages of floating exchange rates

Answer 21

Advantages

• no need for domestic banks to hold foreign currency reserves to intervene in the FOREX market
• doesnt have to meet an exchange rate target so more independent monetary policy
• floating acts as an automatic stabiliser, during world recessions the pound fell which made exports from the UK more competitive
• can account for current account deficit fixing

Disadvantages

• volatility may be a barrier for attracting FDI, also may have affects on business and consumer confidence due to uncertainty
• marshall Lerner theory and J curve issues, depreciated rate doesn’t always improve CA deficit

Question 22

What are the 4 pillars of sustainable development??

Answer 22

• social progress that involves everyone
• prudent use of natural resources
• effective protection of the environment
• economic growth and high employment levels

Question 23

What is regulatory drift and regulatory capture?

Answer 23

regulatory drift- when regulator are so concerned with problems of the past that they miss the arising of new problems

regulatory capture- when regulation favours the businesses much more than the consumers

Question 24

What are the drawbacks of unemployment/ youth unemployment??

Answer 24

• lower contributors to AD as less consumption, young people have higher MPC so multiplier affects may be greater if more of them have more income
• lower standards of living and GDP per capita
• enhances inequality
• higher burden on state finances

Question 25

What two periods of time were important for Keynesian economics and austrian economics respectively, and what did it show?

Answer 25

Keynesian=1929/ the Great Depression, showed the importance of providing a fiscal stimulus to the economy, as it was close to low capacity, proving the Keynesian economic supply curve

Austrian= the 1970s in Britain showed the ineffectiveness of Keynesian economics, stagflation which saw high unemployment and high inflation

Question 26

When talking about Keynesian theory, what diagrams and ideas must be mentioned?

Answer 26

• STICKY WAGES- wages are sticky downwards because workers will not work for any less than the price level
• FISCAL STIMULUS- the importance of the multiplier effect that results from increasing government spending
• LRAS DIAGRAM- Keynesian diagram with sticky wages, the unit elastic part is fine to be operating on in his view, as this is when economies are functioning normally

Question 27

When talking about Austrian economic theory, what diagrams and ideas must be mentioned?

Answer 27

• MICRO- Austrians are concerned with economics on a micro level and reject the ideas of monetary and fiscal stimulus and therefore government intervention
• NRU- short term changes to employment will have no effect as employment will revert back to the NRU, just with higher inflation
• DIAGRAM- micro-looking diagram with AD and AS, and perfectly inelastic LRAS diagram going through the equilibrium point

Question 28

what are the arguments for introducing protectionist policies?

Answer 28

• increases domestic producer surplus by raising the price of imported goods, increasing the competitiveness of the country and possibly improving trade balances to some extent
• China dumping its steel into European markets at such a low price that UK steel became uncompetitive and almost insolvent
• stops businesses being priced out by International competitors and provides jobs to the domestic economy

Question 29

What are the arguments against protectionist policies?

Answer 29

• loss of domestic producer welfare as imports become more expensive, which can lower the standard of living
• demand pull inflation
• retaliation from other countries is likely to occur, which may reduce the opportunity for exporting to these countries, worsening balance of trade eg the trade war between US and China

Question 30

What main evaluation points should inflation be linked?

Answer 30

• what is causing the inflation
• how much it is
• demand pull or cost push

Question 31

what should be mentioned when explaining inflation?

Answer 31

it is self fulfilling- if people expect inflation of 5% due to the past or other factors, they will demand 5% wage increases and 5% or more inflation will be achieved

Question 32

What role does the FPC play?

Answer 32

Financial policy committee- control over risks and threats to the finance system, including making banks improve their liquidity ratios

Question 33

What role does the PRA play?

Answer 33

Prudential regulation authority- these oversee the largest 1700 banking societies and financial institutes in the UK, responsible for the way in which they behave

Question 34

What role does the FCA play?

Answer 34

Financial conduct authority- all about ensuring customer protection and more concerned with the business side of running the banks ie misleading advertising etc