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Economics > Fiscal, Monetary and Supply Side Policies > Flashcards

Fiscal, Monetary and Supply Side Policies Flashcards

1
Q

Policy instruments?

A

Tools governments use to implement their policies, such as interest rates, rates of taxation, levels of government spending

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2
Q

Budget?

A

Government’s spending and revenue plans for the next year

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3
Q

Fiscal Policy?

A

Decisions about government spending, taxation and levels of borrowing that affect aggregate demand in the economy

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4
Q

Why may a Government impose taxation?

A
  • To pay for public sector services
  • To discourage certain activites
  • Help controls AD
  • The distribution of wealth in the economycan be made fairer.
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5
Q

Direct Taxes?

A

Taxes levied on the income earned by firms and individuals

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6
Q

Examples of Direct Taxes?

A 
Income Tax
Social Insurance Taxes - imposed on peoples income and used specifically for pension's benefits and health care
Corporation Taxes 
Capital Gains Tax
Interitance Tax
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7
Q

Indirect taxes?

A

Taxes levied on spending, such as VAT

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8
Q

Value added Tax?

A

Tax on some goods and services - businesses pay value-added tax on most goods and services they buy and if they are VAT registered, charge value-added tax on the goods and services they sell

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9
Q

Examples of Indirect Taxes?

A 
Sales Tax
Duties
Customs Duties
Council Tax
Business Rates
Stamp Duties
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10
Q

Examples of Environmental Taxes?

A

Landfill Tax - imposed on the disposal of waste in landfill sites. The charge is usually linked to the weight of waste dumped in a landfill site

Climate Change Levies are used to help countries. It is paid mainly by the suppliers of electricity, gas and coal

Aggregates Levy - Tax on sand, gravel and rock that is dug from the ground. Designed to reduce the environmental damage cause by quarrying

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11
Q

Fiscal Deficit?

A

Amount by which government spending exceeds government revenue

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12
Q

Fiscal Surplus?

A

Amount by which Government revenue exceeds government spending

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13
Q

National Debt?

A

Total amount of money owed by a country

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14
Q

Impact of a Fiscal Deficit?

A

National Debt grows –> Have to pay back more –> This is an opportunity cost (you could be spending money elsewhere)

Debt gets passed onto future generations

When analysing the size of the fiscal deficits, it is more important to focus on the size of the deficit in relation to the nation’s GDP

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15
Q

Contractionary Fiscal Policy

A

CONTRACTIONARY FISCAL POLICY is a fiscal measure that helps to slow down an economy and reduce aggregate demand. Examples include increasing taxation and decreasing government expenditure.

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16
Q

3 types of Taxation

A

Progressive Taxation: used to INCREASE equality e.g. income tax
A tax where the higher the income of the taxpayer, the larger the percentage of their total income paid in tax.

Proportional Taxation:
A tax where the percentage of total income paid in tax remains the same at different income levels.

Regressive Taxation: may lead to LOWER equality e.g. excise duty on petrol
A tax where higher income earners pay a lower percentage of their income in tax compared to lower income earners

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17
Q

Impacts of Fiscal Surplus

A

Can invest it in a number of things

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18
Q

Impacts of Fiscal Policy on Inflation?

A

Contractionary Fiscal Policy can be used to reduce inflation. If it is thought that inflation is being caused by aggregate demand

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19
Q

Impacts of Fiscal Policy on Inflation?

A

Contractionary Fiscal Policy can be used to reduce inflation. If it is thought that inflation is being caused by aggregate demand.

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20
Q

Impacts of Fiscal Policy on Economic Growth?

A

Expansionary FIscal policy can be used ti help stimulate economic growth.

Increases in Government expenditure will increase aggregate demand.

Economic growth is more likely to result from extra government expenditure on capital projects, such as new schools etc:

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21
Q

Impact of Fiscal Policy on Unemployment?

A

Expansionary Fiscal Policy can help to reduce unemployment

Again increases in governement expenditure and tax cuts can help to stimulate demand.

To meet this demand firms will have to produce more.

This means more staff will be taken on an unemployment will fall

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22
Q

Impact of Fiscal Policy on Current Account Deficit?

A

Fiscal Policy might be used to help influence the balance on the current account. For example, if there is a large deficit on the current account, contractionary fiscal policy will help reduce aggregate demand, This will help to reduce the demand for imports

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23
Q

Impacts of Fiscal Policy on the Environment?

A

Taxes such as landfill tax etc: are used to reduce environmental damage

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24
Q

What is Monetary Policy?

A

Use of interest rates and the money supply to control aggregate demand in the economy

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25
Q

Money Supply?

A

Amount of money circulating in the economy

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26
Q

Base rate?

A

Rate of interest set by government or regional central banks for lending to other banks, which in turn influences all other rates in the economy

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27
Q

Mortgage?

A

Legal arrangement where you borrow money from a financial institution in order to buy land or a house, and you pay back the money over a period of years; if you do not make your regular payments, the lender normally has the right to take the property and sell it in order to get back their money

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28
Q

Rate of Interest?

A

Price of Borrowing money

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29
Q

Why are there different Interest Rates around the World?

A

Different banks charge different rates as they compete with each other

Rates are higher if money is borrowed without security. For Example, the rate charged on a mortgage to buy a house will be lower than the rate charged on an unsecure loan to pay for a holiday.

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30
Q

What do Central Banks do ?

A

Implement the government’s monetary policy and regulating the banking system

Acting as a lender of last resort to commercial banks

Controlling Inflation and stabilising a nation’s currency

Setting Interest Rates

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31
Q

Impact of Monetary Policy (Interest Rates) on Inflation?

A

Inflation would be lower if the interest rates are high. This is because high interests slow down the speed at which the money supply is growing.

Borrowing falls and the money supply grows less quickly

Reduces AD

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32
Q

Impact of Settling IR on Unemployment?

A

A government might use lower IR to reduce unemployment

If IR are cut –> Increase in demand for loans –> Total spending by firms and households would increase –> Firms need to recruit more staff so they can meet this demands

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33
Q

Impact of Settling IR on Economic Growth?

A

Monetary policy might be used to help smooth out the small variations in the economic cycle. For example, if a country’s economy is in a recession they may make IR much lower to increase demand for loans and therefore total spending etc:

The speed at which money supply is growing increases

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34
Q

Impact of Settling IR on The Current Balance?

A

To reduce a deficit, a government might decide to tighten monetary policy . This would lower aggregate demand and reduce demand for imports.

However, if interest rates are raised, the exchange rate might also increase. This would would make exports more expensive, imports cheaper and worsen the current balance .

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35
Q

The Overall effect on the current balance when settlign interests rates depends on the following:

A

The Income elasticity of imports –> If demand for imports were income elastic, higher interest rates would reduce demand for them. This would improve the Current Account Balance

The strength between the link of interest rates and exchange rates: if the link is strong, higher interest rates will raise exchange rates. Exports will become expensive and imports will become cheaper. The Current Balance would worsen

The Price Elasticity of demand for imports and exports: If they are both price elastic and the exchange rate does rise when interest rate rise, the imports become cheaper and exports will be dearer.

This would worsen the Current Account Balance

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36
Q

What is a boom?

A

Time when business activity increase rapidly, so that the demand for goods increases, orices and wages go up, and unemployment falls

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37
Q

What is a boom and bust?

A

When an economy regularly becomes more active and succesful and then suddenly falls

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38
Q

What is inflation?

A

Rate at which prices rise, a general and continuing rise in prices

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39
Q

What is Macroeconomics?

A

Study of large economic systems such as those of a whole country area of the world

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40
Q

What are the Macroeconomic Objectives?

A

Reducing Unemployment

Protecting the Environment

Balance of Payments

Redistribution of Income

Controlling Inflation

Economic Growth

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41
Q

Economic Growth?

A

Increase in the level output by a nation

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42
Q

National Income?

A

Value of income, output or expenditure over a period of time

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43
Q

Why is Economic Growth Desirable?

A

If the economy is producing more –> businesses are more profitable and share prices rise –> easier for businesses to raise more capital and employ more workers –> Incomes Rise –> Spend more money on goods and services –> Even More Economic Growth

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44
Q

GDP?

A

Market Value of all final goods and services produced in a period, an internationally recognised measure of national income

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45
Q

Nominal GDP?

A

The value of goods and services produced by a country in a given period of time

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46
Q

Real GDP?

A

The value of goods and services produced by a country, having been adjusted for inflation

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47
Q

GDP per Capita?

A

Total Value of output produced in an economy over a period of time which is adjusted for inflation and expressed per head of population

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48
Q

Total Growth in GDP

A

The % change in the value of GDP over a period of time

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49
Q

Economic Cycle?

A

Periods of time where economic growth fluctuates.

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50
Q

Booms?

A

Peak of economic cycle where GPD is growing at its fastest

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51
Q

Downturn?

A

Period in the economic cycle where GDP grows, but more slowly

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52
Q

Recession?

A

Period of temporary economic decline which is identified by a fall in GDP for 2 consecutive quarters

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53
Q

Recovery?

A

Period in the economic cycle where GDP starts to rise again. Businesses and consumers regain their confidence and economic activity is on the increase.

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54
Q

Overheat?

A

When demand is rising too fast causing rpices to rise, a situation that governments might try to rectify by raising taxes or when the central bank might try raising interest rates to curb demand

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55
Q

Unsustainable Growth?

A

Economic Growth that is not possible to sustain without causing environmental problems

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56
Q

Human Capital?

A

Refers to the level of skill and education of the workforce

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57
Q

What does it mean when the percentage change in real GDP is greater than 0?

A

Economy is Growing

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58
Q

If the percentage in real GDP is less than 0?

A

The economy is shrinking

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59
Q

How is GDP measured?

A

Output Measure - Total Value of the goods and services produced by all sectors of the economy

Expenditure Measure- The Value of the goods and services brought by households and by government, investement in machinery and buildings

Income Measure- the Value of income generated mostly in terms of profits and wages

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60
Q

What is GDP used for?

A

Settling Interest Rates- If prices are rising too fast, the bank could increase interest rates to try and control them

Planning Economic Policy - If Economy is Shrinking the amount the gov. gets from taxes decreases

Compare Growth between different countries

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61
Q

Limitations of GDP?

A

Hidden Economy –> Doesn’t capture Unpaid Work in official figures (caring for an elderly relative)

Inequality- GDP doesn’t tell us how income is split across a population. A rising GDP could result from the richest segment getting richer

GDP doesn’t mean higher standards of living (GDP often will increase in war due to increased spending)

Doesnt take into account well being

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62
Q

What other Limitations are there of using GDP as a measure of economic growth?

A 
Inflation
Population Changes
Statistical Errors
Home Produced Goods
Hidden Economy
External Costs
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63
Q

Why are Population Changes a limitation to using GDP as a measure if Economic Growth?

A

An Increase In Population –> Increase Demand and Increased Workforce etc: –> Higher GDP

Doesn’t tell u the standrads of living in the country

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64
Q

Why is Inflation a limitation to using GDP as a measure of Economic Growth?

A

Inflation can make it appear that GDP has risen when actually it might not have

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65
Q

Why are Home Produced Goods a limitation to using GDP as a measure of Economic Growth?

A

Some goods and services are not Traded and therefore there is no record of these transactions taking place. National income will be understated

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66
Q

Why is the Hidden Economy a limitation to using GDP as a measure of Economic Growth?

A

GDP figures become innacurate

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67
Q

Why is External Costs a limitation to use GDP as a measure of Economic Growth?

A

Combustion of fossil fuels –> Good for economy

Bad for the environment

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68
Q

What happens when their is Economic Boom?

A 
High Confidence
Increasing Income
Increasing Spendng/ Demand
Low Unemployment
High Inflation 
High Profits
High Investment
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69
Q

What happens during Recession?

A 
Low Confidence
Low Spending
Low Income
Low Business Profit
High Unemployment
Low SoL
High Bankruptcies
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70
Q

What happens during Downturn?

A 
Falling Confidence
Falling Spending
Income and Unemployment Rising at a slower rate
Falling Inflation
Investment Rising at a slower rate
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71
Q

deflation?

A

Period where the level of AD is falling

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72
Q

CPI?

A

measure of the general price level

Every Month, the government records the prices of about 600 goods and services purchased by over 7000 families.

This average prices is then converted into an index number

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73
Q

Retail Price Index?

A

Measure of the general price level, which includes house prices and council tax

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74
Q

Demand Pull Inflation?

A

Inflation caused by too much demand in the economy relative to supply

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75
Q

What causes Demand Pull Inflation?

A
  • Rising Consumer spending encouraged by tax cuts or low Interest Rates
  • Sharp increases in Government spending
  • Rising Demand for resources by firms
  • Booming demand for exports
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76
Q

What is Disinflation?

A

Disinflation is a decrease in the rate of inflation – a slowdown in the rate of increase of the general price level of goods and services in a nation’s gross domestic product over time.

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77
Q

Cost-Push Inflation?

A

Inflation caused by rising Business Costs

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78
Q

What is the relationship between Inflation and interest rates?

A

nflation may be caused when households, firms and the governmnet borrow more money from banks to fund extra spending. This adds to the money supply because there are now more bank deposits. The extra money lent by the bank creates more demand and prices are driven up. This type of inflation is more likely to increase when interest rates are low because consumers would have to pay back less

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79
Q

Impacts of Inflation?

A

High Prices –> LOW PPP
.High Wages due to High Prices. Firms increase Prices so Workers demand Higher Wages (Cycle repeats)
.Lower Exports due to higher prices
.Reduced Unemployment in order to achieve output needed because of the increased aggregate demand (Demand-Pull Inflation)
.Increased Menu Costs (In resturants you have to update the increased prices)
.Increased Shoe leather costs
.Uncertainty (How can a supplier make profit if it doesn’t what it’s price is going to be)
.Decreased Consumer Confidence
.Decreased Investment (We don’t know how Inflation changes prices)

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80
Q

Monetarists?

A

Economists who believe there is a strong link between growth in the money supply and inflation

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81
Q

Interest Rates?

A

Price Paid to lenders for borrowed money; it is the price of money

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82
Q

Purchasing Power of Money?

A

Amount of goods and services that can be bought wit a fixed sum of money

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83
Q

Menu Costs?

A

Costs to firms of having to make repeated price changes

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84
Q

Shoe Leather Costs?

A

Costs to firms and consumers of searching for new suppliers when inflation is high

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85
Q

Hyperinflation?

A

Very high levels of inflation; rising prices get out of control

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86
Q

Transactions?

A

Payment, or the process of making one

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87
Q

Definition of Unemployment?

A

People who are not working who want a job but cannot find work

88
Q

How do you measure Unemployment?

A

Labour Force Survey organised by the International labour Organisation

Over 100,00 people in 40,000 households are surveyed every month.

89
Q

Problems with ILO survey?

A

International Comparisons are different because the way that unemployment is measured varied widely between countries

90
Q

Advantages of Labour Force Survey?

A

More People will admit to employment than claim benefits

91
Q

Advantages of Claimant Count?

A

Broad Measure

Easy and Quick to Measure

92
Q

Disadvantages of Labour Force Survey?

A

Only once every 3 months

93
Q

Disadvantages of Claimant Count?

A

Some can’t claim benefits (they have savings or a partner who earns money)

Some people won’t claim it (pride/ego)

94
Q

What is Claimant Count?

A

A way of measuring Unemployment

This is calculated using the number of UK workers claiming the Job seekers allowance

Always lower because people under 18 or over 65 can’t claim it

95
Q

What is Cyclical Unemployment?

A

When Unemployment is caused by a recession

Falling demand for goods and services –> fall in derived demand for labour

96
Q

What is the solution to cyclical unemployment?

A

Training Programmes so people can find work in the down season

97
Q

What is Seasonal unemployment?

A

Demand for some professions will fluctuate according to the time of the year –> Unemployment during seasons where demand is low

98
Q

Solutions to Seasonal Unemploment?

A

Training Programmes so people can find work in the down season

99
Q

What is Frictional Unemployment?

A

When People are short term unemployed when moving between jobs or leaving education

100
Q

Solution to Fricitional unemployment?

A

Job centres and Websites which can provide information about jobs to unemployed

101
Q

What is Structural Unemployment?

A

Mismatch between the skill of workers and industry demands

102
Q

What are the three main types of Structural Unemployment?

A

Sectoral- When the economy moves from one sector to the next and some workers don’t have the skill for the new sectors

Technological Unemployment- New Technologies make Labour Redundant

Regional Unemployment - The industry a certain region is dependent on goes into deadline, leaving very high levels of local unemployment

103
Q

What is Geographical Immobillity?

A

Barriers restricting workers from moving to a different of work (Transport Costs)

104
Q

What is Occupational Immobillity?

A

Barriers restricting workers from changing profession (lack of skill due to lack of education)

105
Q

Solutions to Occupational Immboillity?

A

Get training

106
Q

Solutions to reduce Geographical immobillity?

A

Buy a car –> Reduces time taken to get there

Buy a house –> Ties someone to one location

107
Q

What is Voluntary Unemployment?

A

Unwilling to work at the current wage rate
Unwilling to retrain
Unable to work because of Geographical and Occupational Immobillity

108
Q

Solutions to voluntary Unemployment?

A

Raise Minimum Wage and lower job seekers allowance –> Encourages people to go to work

Retraining Schemes –> Give them loans to go to school

Only give people benefits who are applying for jobs

or using the free trading schemes

109
Q

Impacts of Uenmployment?

A 
Lower Output
Wasteful Use of Scarce Resources
Increased Poverty
Increased Government Spending on benefits
Decreased Tax Revenue
Consumer Confidence falls
Business Confidence falls
Worsened Society
110
Q

Balance of Payments?

A

Record of all transactions relating to international trade

111
Q

Capital and Financical Account?

A

That part of the balance of payments where flows of savings, investment and currencies are recorded

112
Q

Current Account?

A

Part of the Balance of payments where all exports and imports are recorded

113
Q

Exports?

Imports?

A

Goods and services sold overseas

Goods and Services bought from overseas

114
Q

Current Account Deficit?

A

When Value of imports exceeds the value of exports

115
Q

Current Balance?

A

Difference between total exports and total imports (invisible and visible)

116
Q

Balance of Trade or Visible Balance?

A

Difference between visible exports ands visible imports

117
Q

Invisible Trade?

Visible Trade?

A

Trade in Services

Trade in Physical Goods

118
Q

Primary Income?

A

Money received from the loan of production factors abroad

119
Q

Secondary Income?

A

Gov transfers to and from overseas agencies such as the EU

120
Q

Exchange Rate?

A

Price of one currency in terms of another

121
Q

How do Exchange Rate and Current Account Interact?

A

If a Country’s exchange rate gets stronger –> Exports more expensive and imports become cheaper –> Fewer Exports sold and more Imports bought –> Current Account Deficit but if the CA is already in Deficit then the Deficit will grow

122
Q

How may Exchange Rates become stronger?

A

If a country has a surplus on the CA resulting from rising sales of goods abroad, demand for that country’s currency will rise. This could drive up the xchange rate.

123
Q

Reasons for Deficits and Surpluses?

A

Quality of Domestic Goods –> Increased Demand For Exports due to rising Sales from Overseas Buyers

Quality of Foreign Goods –> Increase In Demand For Imports due to Rising Sales from buyers in our Country

Price of Domestic Goods

Price of Foreign Goods

Exchange Rates Between Countries –>

124
Q

Impact of a Current Account Deficit?

A

Leakages from the Economy –> Output and Employment levels in the domestic economy are under threat

Inflation –> If the prices of imports go up, this will be reflected in the general price level since many imported goods will counted when the CPI is calculated. Consequently, rising imports prices will result in higher domestic inflation levels

Low Demand for Exports –> Due to poor quality of goods or services or the price may just be too high. This results in the country undergoing progressives decline in economic growth and a rise in unemployment (This may mean that they are not competitive in certain industries)

Funding the Deficit –> It will need foreign currency to pay for the rising quantity of imports that are being purchased.
May need to borrow
Causes Major Problems

125
Q

Government Intervention to Protect the Enivronment?

A

Taxation

Subsidies

Regulation

Fines

Pollution Permits

Park Provisions

126
Q

Why must the government protect the environment?​

A

Sustainability.​

Maintain tourism.​

Avoid externalities. ​

​

127
Q

Pollution

A

3rd party externalities that need to be reduced. ​

128
Q

Different Types of Pollution

A

Noise – heavy industry leads to negative effects on others through noise (construction).​

Air – CO2 emissions from heavy industry leads to climate change. ​

Water – chemical production can lead to poisoning of water supply. ​

Visual – heavy industry/mining damage the beauty of nature. ​

129
Q

Why are Regulations useful in protecting the

nivronment?

A

Provided financial disincentives to breaking rules that are set (fines reduce profitability). Government can therefore stop firms/consumers’ polluting behaviour. ​

130
Q

Problems with using Regulations to protect the environment?

A

Small fines may not deter polluting firms.​

Encourage firms to just break the rules to avoid the fines. ​

Costly to enforce and regulate firms. ​

131
Q

Why is Taxation useful in protecting the environment?

A

Government imposes taxes on the use of polluting materials (Petrol tax/landfill/Co2). Indirect Tax => raise costs of production for firms selling polluting products. Fall in S, increase in P, fall in the consumption of polluting material. ​

132
Q

Problems with using Taxation in protecting the environment?

A

Depends on PED​

Firms may cut costs elsewhere in order to keep producing the product. ​

High costs of production can lead to inflation. ​

133
Q

National Park

A

An area of countryside, or occasionally sea or fresh water, protected by the state for the enjoyment of the general public or the preservation of wildlife.

134
Q

How are National Parks used to Protect the Environment?

A

Protects the area of land from commercial development

The development of national parks provides an opportunity cost for the building of factories, roads

135
Q

Problems with National Parks for protecting the Environment?

A

An increase in tourism can lead to visual pollution due to excess litter which will damage the surrounding wildlife.

136
Q

Subsidies

A

Grants, tax allowances or other financial help given to firms as an incentive to reduce activities that damage the environment

137
Q

How are Subsidies used to protect the environment?

A

Government can offer grants, tax allowances and other subsidies to firms (which produce goods that have no external costs to the environment) as an incentive to reduce activities that damage the enivronment –> This will lower costs of production for firms to produce that specific good or service which is sustainable to the environment –> Since firms are profit incentivised (they want to increase profit as much as possible) they will take these subsidies

138
Q

Problems with Subsidies

A

There could be less supply because if the prices are cheaper there could be an increase in demand.

Also if the cost of production is cheaper there could be much produce in administration => diseconomies of scale.

It can lead to government debt or an opportunity cost because the money could be used elsewhere.

Government can keep the subsidies funds to themselves

139
Q

Definition of Pollution Permits?

A

They determine the amount of pollutants a firm can produce in a given amount of time

140
Q

How do Pollution Permits work?

A

Pollution permits legally allow firms to pollute a certain amount. Firms can buy and sell permits for profit if they do not need to pollute. Provides an incentive to firms to reduce pollution so they can increase revenue by selling permits to other firms.

141
Q

Problems with Pollution Permits?

A

Firms can buy and sell pollution permits to each other. This doesn’t help reduce pollution as moving permits offsets the damage of pollution to another place.

Increases barriers to entry as new firms have to apply for permits before they can begin operation.

Firms having to buy permits => result in cost-push inflation as cost for firms rise => offset prices to consumers.

142
Q

Definition of Tax?

A

Charges imposed on firms or individual that can be direct or indirect.

143
Q

Income Inequality?

A

Differences in income that exist between the different groups of earners in society, that is, the gap between the rich and the poor

144
Q

Reasons for Income Inequality?

A
  • Workers with natural talent, a good education, valuable work experience or who can offer labour in a market where there is a shortage of qualified labour, will tend to earn more
  • People who do not work, such as pensioners, receive lower incomes than those in employment
  • The extent to which a government redistributes income through taxes and welfare payments is influential
  • People who own assets such as property, shares and capital will enjoy additional income such as rents, dividends, and interest, respectively.
145
Q

What is the Lorenz Curve?

A

Graphical Representation of the degree of income or wealth inequality in a country

146
Q

Absolute Poverty?

A

Where people do not have resources to meet all of their basic human needs

147
Q

Relative Poverty?

A

Poverty that is defined relative to existing living standards for the average individual (60% of the average)

148
Q

Reasons to reduce poverty and inequality?

A

Meet Basic Needs

Raise Living Standards (However people who do live in relative poverty generally have lower life expectancy)

Ethical Reasons

149
Q

Aggregate Supply?

A

Total Amount of goods and services produced in a country at a given price level in a given period of time

150
Q

Supply Side Policies?

A

Government measures designed to increase aggregate supply in the economy

151
Q

Offset?

A

If something, such as cost or sum of money, offsets another cost it has the effect of reducing or balancing it, so that the situation remains the same

152
Q

Tradeoff

A

A tradeoff is where one thing increases, and another must decrease. … In economics, a trade-off is commonly expressed in terms of the opportunity cost of one potential choice, which is the loss of the best available alternative

153
Q

MNCs

A

Firms that operate and produce Goods and Services in more than one country

154
Q

FDI

A

When a company makes an investment in a foreign country. This usually involves the purchase of capital goods in the foreign country

155
Q

International Debt?

A

Debt owed by one government to another foreign government or corporation. This needs to be repaid with interest

156
Q

Trading Blocs?

A

refers to an agreement betwen governments to reduce or eliminate barriers to trade between the participating countries

157
Q

Commodities

A

COMMODITIES are natural resources that come from the earth and include wheat, soybeans, corn, cattle, gold, oranges, copper, aluminum, coal, cotton and oil.

158
Q

Development or Foreign Aid

A

DEVELOPMENT AID or FOREIGN AID is financial aid given by governments or other agencies to support the development of developing countries. It aims to alleviate poverty in the long term rather than a short-term focus (which is the purpose of humanitarian aid).

159
Q

Development Gap

A

DEVELOPMENT GAP refers to the widening difference in levels of development between the world’s richest and poorest countries. This development gap can also occur within countries, for example between regions or between urban and rural areas.

160
Q

Features of MNCs?

A

Huge assets and revenue

Highly Qualifief and experienced managers and executives

Powerful Advertising

High tech

Very Efficient (EOS_

161
Q

Why do MNCs and FDI exist?

A

EOS

Technical and Financial Superiority

Access to overseas Markets - gaining market share and global branch loyalty

Access to cheaper FOP

Lower transport and communication costs

Reduced trade barriers

All of the above helps to increase the sales revenue and PROFITS

162
Q

How may a government attract an FDI?

A

Can provide incentives:

offer tax breaks, subsidies, grants and low interest loans
Better infra
improved education –> better human capital
relaxed trade barriers

163
Q

How does FDI lead to Globalisation?

A
  • FDI usually improves the living standards of the country in which it is placed. This money is usually spent on foreign G&S, driving globalisation.
  • FDI requires that raw materials enter the country and finished goods leave the country. Therefore, there must be little trade protectionism in countries that receive FDI, which drives globalisation.
  • FDI requires flows of money into and out of a country, therefore banking systems must be compatible with the global network.
164
Q

Advantages of FDI?

A

Increased Employment –> Increased EG

Brings Business knowledge into the country

They may pay taxes –> Boosts Government budget

FDI bring money into the country –> increases FDI –> boosts BOP. (These goods may also be exported which also improves BOP)

Improves Infra

165
Q

Disadvantages of FDI?

A

MNCs are large –> have greater EOS than local firms, –> unit cost will be lower. When domestic companies shut down, unemployment will rise.

Some MNC’s may exploit workers where there are no labour laws

Tax Avoidance

Environmental Damage

MNCs send profits back to their own country

166
Q

Problems to a country when an MNC leaves?

A

increased unemployment

loss of trade

Worsens CA due to loss of exports from the MNC

167
Q

Why do MNCs invest overseas?

A

Access to cheaper labour (in developing countries)  Lower Costs of Production  Higher Profits

  • Access to new markets (new customers)  Increased AD (Investing into the EU allows them to access everywhere)
  • Gaining expertise in new country or market
  • Access Resources (e.g. China investing in Australia to access reserves of iron ore, copper, etc:)
168
Q

Reasons for Free Trade?

A

For Developing countries, access to capital through trade for development

To access resources that are not found domestically

Specialisation: Countries can focus on what they are best at producing and trade for everything else. This leads to higher levels of productivity –> lower prices and higher quality

169
Q

Disadvantages of Free Trade?

A

Domestic firms may not be able to compete with cheap imports (esp. from MNCs with EOS) –> loss of domestic GDP and development

Loss of employment in developed countries as MNCs may outsource production to less developed economies due to lower wages

Some countries CA might worsen

170
Q

Advantages of Free Trade?

A

Lower Price

Increased Choice

More competition in domestic markets  higher efficiency (lower prices and higher quality)

Increases specialisation  Lower ccosta nd higher productivity

171
Q

Free Trade?

A

Situation in which the goods coming into or going out of a country are not controlled or taxed

172
Q

Protectionism?

A

Approach used by governments to protect domestic producers

173
Q

Trade Barriers?

A

Measures designed to restrict imports

174
Q

Dumping?

A

Where an overseas firm sells large quantities of a product below cost in the domestic market

175
Q

Infant Industries?

A

New Industries yet to establish themselves

176
Q

Tarrifs or Custom Duties?

A

Tax on imports to make them more expensive

177
Q

Embargo?

A

Official order to stop trade with another country

178
Q

Quota?

A

Physical limit on the quantity of imports allowed into a country

179
Q

Bi-lateral Trade Agreement?

A

Trade deals between only two countries

180
Q

Trade Blocs?

A

Groups of countries situated in the same region that join together and enjoy free trade that is free of tariffs, quotas, and other trade barriers such as regulation

181
Q

Why might countries want to reduce free trade?

A

To reduce imports to improve trade deficit

To protect jobs - reduce cheap imports outcompeting domestic firms

Developing Countries: to protect new and growing industries from cheap imports from MNCs

Desire to protect declining industries

Response to Dumping

182
Q

How might countries reduce free trade?

A

Quotas, Tariffs, Subsidies

183
Q

Effects of Tariffs?

A

If the government places an indirect tax on imports –> Higher cost of Production for firms –> fall in supply of imports –> raises the price of imports and reduce the quantity demanded of imports

Domestic firms will find it easier to compete

184
Q

Effects of Quotas?

A

This policy directly reduces the quantity imported to a fixed amount. As supply of the import falls –> higher prices, allowing domestic firms to compete more easily

185
Q

Would Government finance increase with Quotas and Tarrifs?

A

It would increase with tarrifs but not quotas

186
Q

Advantages of Quotas

A

Domestic firms will find it easier to compet –> higher levels of employment

A very clear reduction in imports to a fixed amount

187
Q

Disadvantages of Quotas

A

Consumers will face higher prices of goods and services

Firms may have to pay more for capital goods –> reduction in investment

Firms may have to push for more factors of production –> Cost-Push inflation

188
Q

Advantages of Tariffs

A

Raises Tax Revenue for the government

Domestic firms will find it easier to compete –> High levels of employment

189
Q

Disadvantages of Tariffs

A

Consumers will face higher prices of goods and services

Firms may have to pay more for capital goods –> reduction in investment

Firms may have to push for more factors of production –> Cost-Push inflation

190
Q

Advantages of Subsidies as a means of reducing imports?

A
  • Lower prices for consumers
  • May increase exports –> improves CA
  • Can be used to protect domestic supply of key products
191
Q

Disadvantages of Subsidies as a means of reducing imports?

A

Huge cost to the government

192
Q

Disadvantages of Subsidies as a means of reducing imports?

A

Huge cost to the government

Other countries may retaliate by raising tariffs on imports.

193
Q

How does Inflation affect Unemployment?

A

If Domestic prices for G and S are Rising faster than international competitors

Decrease in demand for domestic G and S because

-As Prices increase people consume less because they have less income

OR

Some people save during Inflation

Decrease in Demand will lead to Unemployment as firms will not need to produce as many G and S and therefore less workers are demanded

194
Q

How is Improving the Flexibility of TU’s useful in implementing productivity?

A

Improving the flexibility of Trade Unions (Anti TU legislation)

–> (TU’s have been criticized for increasing wages and resisting new production technique)

–> Prevents labour productivity from improving.

Anti Legislation causes less disruption and strikes –> increase in productivity –> Increased Aggregate Supply

195
Q

How are Education and Training used in implementing productivity policies?

A

If people receive more education and training –> quality of human workforce/human capital increases

Increases labour productivity –> Increase in Aggregate Supply

196
Q

How is Competition used in implementing productivity?

A

Some Supply Side policies are designed to promote more competition (Privatisation and Deregulation)

Increased Competition –> Increased pressure on firms to be more cost-effective and innovative –> helps raise productivity

197
Q

How can Investment be used to implement Productivity

A

If businesses purchase more tech and update their production facilities, efficiency will improve

198
Q

How does Education and Training work in SSP?

A

A well-trained workforce will be more productive –> average costs per unit will decrease –> economy’s products more price-competitive –> exports will increase, increasing employment.

TRAINING programmes increase the occupational mobility of labour and therefore decrease structural unemployment

199
Q

Why may Privatisation backfire?

A

Privatisation can increase unemployment. When private sector firms take control of public sector firms, they will try to reduce costs. As private sector firms are often over staffed (ie employ more workers than are needed), this will often involve redunancies ie increasing unemployment.

200
Q

How do Monetary policies work?

A

Expansionary Monetary Policy use Quantitative Easing

Gov buy assets from banks –> Banks have more money –> more willing to lend money at lower IR –> Increased Borrowing –> Increased AD –> Increased EG.

This restores price stability

Contractionary Monetary Policy:

Increased IR –> Increased costs of borrowing/return on savings –> Increase in savings and a fall in consumption –> AD falls –> Inflation falls

201
Q

Problems with Monetary Policy?

A

Time Lag for IR to impact the economy

Won’t affect people with fixed interest

Tradeoff between lower Inflation and High EG

Banks may not pass lower IR onto consumers

202
Q

How do Fiscal Policies work?

A

It’s different for each case

  • Cuts or raises in Income Tax
  • Cuts or raises in VAT
  • Cuts to Corporation tax
  • Spending on Welfare
  • Spending on education and healthcare
203
Q

Shortcomings of Fiscal Policies?

A

Increase in Gov debt –> Government tends to be less productive

Investments are not effective in fully capablecity

204
Q

How do SSP work?

A

Many different SSP’s, all aim to increase productivity –> increase in the output –> increased efficiency –> increase in long term EG and decrease in inflation

Investment on Infrastructure
Spending on Education and Healthcare
Deregulation
Privatisation

205
Q

Shortcoming of SSP?

A 
Time Lags (education and infrastrcutre)
Only most effective when the economy is at full capacity
206
Q

WTO?

A

International organisation

promotes free trade

by persuading countries to abolish tariffs and other barriers.

207
Q

What does the World Trade Organisation do?

A

Polices free trade agreements

settles trade disputes between governments and organises trade negotiations

208
Q

Aims of the World Trade Organisation?

A

Trade Negotiations (anti-dumping, subsidies and product standards)

209
Q

Trade Liberalisation?

A

A move towards greater free trade through the removal of trade barriers

210
Q

Criticisms of the WTO?

A

-UNDEMOCRATIC –> WTO rules are written by corporations.

Views of Consumers, environmentalists, human rights etc: are often ignored

-Favours the Rights of Corporations over those of workers

WTO has ruled that it is illegal for a government product based on the way it is produced

  • Destroys the Environment
  • Favours wealthy nations over poorer ones

Negotiators from poor countries aren’t invited to meetings

211
Q

Why has there been an increase in World Trade?

A

Better transport and communications: More efficient transport systems –> goods can be shipped more quickly and cheaply. This reduces the cost of selling abroad

Relaxing of Trade Barriers

Development of Multinationals

Travel and Customer awareness

Trade agreements

212
Q

What is trade like in developed countries?

A

Loss of trade in manufacturing

More Air Travel

Widening of the development gap

213
Q

What is trade like in developing countries?

A

Increase in net migration

Increased FDI in Africa

A rise in Commodity and dependence

Debt cancellation

Reduction in Barriers

214
Q

Commodities?

A

A product that can be sold to make a profit

ESPECIALLY ONE IN ITS BASIC FORM BEFORE IT HAS BEEN USED OR CHANGED IN AN INDUSTRIAL PROCESS.

215
Q

How does Economic Growth lead to a worsened environment?

A

As businesses produce more output –> more emissions from power generators

Economic Growth ==> increase in disposable income ==> increase in total spending of cars ==> these produce emissions

As more Land is taken for business development, less is available for wildlife

216
Q

How does Inflation interact with the Current Account?

A

Increase in Inflation –> Increase in the general price level –> fewer consumers have the disposable income required to purchase that product –> Total Spending decreases –> Exports decrease –> Current Account Balance is worse

If a government uses monetary policy to reduce inflation, the balance of payments situation could actually become worse.

Contractionary Monetary Policy –> uses higher IR to reduce inflation–> Might strengthen the exchange rate –> When interest rates are high –> demand for domestic currency rises –> exports dearer and imports cheaper –> further pressure on the current account balance

217
Q

How are Current Account Deficits self-correcting?

A

In a floating exchange rate, a large current account deficit should put downward pressure on the currency. If the UK imports more than exports then this involves selling Sterling to buy foreign currency to be able to afford the imports. A depreciation of the currency will make UK exports cheaper, imports more expensive and thus help to reduce the current account deficit and reduce the disequilibrium.

Economics (11 decks)

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