Global Economics knowledge

Question 1

benefits of free trade

Answer 1

increase competition, greater efficiency in production, lower prices for consumers, greater choice for consumers, acquisition of needed resources, source of foreign exchange, access to larger markets, economies of scale in production, more efficient resource allocation, increased domestic production and consumption due to specialisation

Question 2

comparative advantage theory assumptions

Answer 2

there is full employment of all resources, there is perfect mobility of factors of production, there is free trade, there are homogenous products, transportation costs are ignored

Question 3

arguments for trade protection

Answer 3

infant industry protection, national security, health safety and environmental standards, efforts of a developing country to diversify, unfair competition, tariffs as a source of revenue, correcting balance of payment deficit, protection of domestic jobs

Question 4

argument against tade protection

Answer 4

consumers lose in most cases, global resource allocation worsens, foreign producers are worse off in all cases, possible negative effect on price level, GDP and employment, possible negative effect on country’s competitiveness, may give rise to trade wars

Question 5

trading bloc types

Answer 5

free trade area, customs union, common market

Question 6

trading bloc advantages

Answer 6

trade creation, increased competition, expansion to larger markets, economies of scale, increased investment, lower prices for consumers, greater consumer choice, improved resource allocation, greater economic growth, stronger bargaining power

Question 7

trading bloc disadvantages

Answer 7

possible trade diversion, loss of sovereignty, unequal distribution of gains and losses

Question 8

causes of changes in exchange rates

Answer 8

foreign demand for exports, domestic demand for imports, rate of inflation relative to other countries, relative interest rates, relative growth rates, FDI and portfolio investment, remittances, central bank intervention, speculation

Question 9

intervention to maintain a fixed exchange rate

Answer 9

exchanging official reserves, increases in interest rates, borrowing from abroad, efforts to limit imports

Question 10

balance of payments

Answer 10

current account, capital account, financial account

Question 11

current account

Answer 11

balance of trade in goods, balance of trade in services, income, current transfers

Question 12

capital account

Answer 12

capital transfers, transactions in non-produced non-financial assets

Question 13

financial account

Answer 13

foreign direct investment, portfolio investment, reserve assets, official borrowing

Question 14

effects of depreciation

Answer 14

demand-pull inflation (if increase in demand is greater than a decrease in supply) cost-push inflation (if the decrease in supply is greater than the increase in demand), economic growth increase (if increase in demand is greater than a decrease in supply, the economy grows), economic growth decrease (if the decrease in supply is greater than the increase in demand, economy contracts), effect on unemployment, increased value of foreign debt, decreased living standards, current account surplus

Question 15

effects of appreciation

Answer 15

lower inflation, reduced economic growth, increased unemployment, decreased value of foreign debt, increased living standards, current account deficit

Question 16

advantages of monetary union

Answer 16

single currency eliminates exchange rate uncertainty and transaction costs, single currency promotes a higher level of inward investment, commitment to low rates of inflation gives rise to low interest rates, more investment, and increased output

Question 17

disadvantages of monetary union

Answer 17

loss of domestic monetary policy, loss of exchange rates as a mechanism for adjustment, differing impacts of monetary policy on each country

Question 18

consequences of current account deficit

Answer 18

depreciating exchange rates, foreign ownership of domestic assets, increasing levels of debt, cost of paying interest on loans, possible need for higher interst rates to attract foreign investment, poor international credit rating, possible lower economic growth, lower living standards in the future, fewer imports of needed capital goods, contractionary demand-side policies

Question 19

consequences of current account surpluses

Answer 19

low domestic consumption, insufficient domestic investment, appreciation of the domestic currency, low inflation, reduced export competitiveness, the possibility of retaliation by trading partners through trade barriers (surplus in one country corresponds to deficit in another)

Question 20

policies to correct current account deficit

Answer 20

expenditure reducing policies (reducing aggregate demand), expenditure switching policies, trade protection, depreciation, supply-side policies to increase export competitiveness

Question 21

Marshal-Lerner condition

Answer 21

depreciation improves trade balance only if the sum of PED of imports and PED of exports is larger than 1

Question 22

signle economic development indicators

Answer 22

GDP/GNI per capita, GDP/GNI per capita in terms of PPP, health indicators (life expectancy, infant mortality), education indicators (literacy rates, primary school enrollment), economic inequality indicators (Gini coefficient, minimum income standards), social inequality indicators (child labor, old-age pension recipients), energy indicators (acess to electricity)

Question 23

composite economic development indicators

Answer 23

Human Development Index, Gender Inequality Index, Happy Planet Index

Question 24

economic barriers to development

Answer 24

economic inequality, limited access to infrastructure (financing problems, resource allocation), limited access to appropriate technology (labor-intensive technologies, capital intensive technologies), low levels of human capital (untrained teachers and doctors, insufficient funding, insufficient facilities, limited access to schools/healthcare), dependence of production and exports on primary sector, limited access to international markets (tariffs, agricultural subsidies in rich countries), informal economy, capital flight, indebtedness, geography, tropical climate

Question 25

political barriers to development

Answer 25

weak institutional framework (legal system, ineffective taxation system, banking system, property rights), lack of good governance and corruption, unequal political power and status

Question 26

strategies for economic growth and development

Answer 26

international trade strategies, diversification of economic activity, market-based policies, interventionist policies, foreign direct investment, foreign aid, debt relief, institutional change

Question 27

international trade strategies

Answer 27

import substitution, export promotion, economic integration, trade liberalisation

Question 28

import substitution

Answer 28

high protection of domestic firms, overvalued exchange rates (to import capital cheaply), too much government intervention in the economy

Question 29

export promotion

Answer 29

finantial assistance to targeted key industries, strong government intervention in the economy (public investment), requirements imposed on multinational corporations (promoting R&D and training domestic workers), undervalued exchange rates

Question 30

export promotion advantages/disadvantages

Answer 30

expansion into foreign markets, emphasis on diversification, major investments in human capital, appropriate technology usage, increased employment, no balance of payments problems, overly dependent on exports, trading partners might implement trade protection to correct their trade benefits

Question 31

import substitution advantages/disadvantages

Answer 31

encouragement of capital intensive production, deterioration in balance of payments, negative effects on employment and income, limited possibilities to grow in the long term

Question 32

diversification of economic activity

Answer 32

sustained increases in exports, development of technological skills, reduced vulnerability to price volatility, use of domestic primary commodities

Question 33

market-based policies

Answer 33

trade liberalisation (cons: limited benefits for export growth and diversification, limited effect on economic growth, increasing income inequalities), privatisation of state enterprises, deregulation of labour and product market

Question 34

interventionist policies

Answer 34

redistribution policies, provision of merit goods (education, health services, infrastructure)

Question 35

redistribution policies

Answer 35

tax policies (increasing progressivity, expanding indirect taxes on luxury goods, reducing tax evasion), transfer payments ( reduce poverty, improve acess to healthcare), minimum wages

Question 36

foreign direct investment advantages

Answer 36

MNC can supplement insufficient foreign exchange earnings, improve upon local technology and skills, lead to greater tax revenues, promote local industries (buying localy produced inputs), increase local employment, lead to economic growth

Question 37

foreign direct investment disadvantages

Answer 37

possible environmental degradation, promoting inappropriate consumption patterns, MNC can use their economic and political power to promote policies that work against economic development

Question 38

foreign aid

Answer 38

promotes economic growth, improves income distribution, poverty alleviation, possible corruption, conditionality of foreign aid (possibly also tied aid), volatility and unpredictability of aid, uncoordinated donors

Question 39

institutional change

Answer 39

microfinance (cons: high interest rates, contribute to informal economy), mobile banking, reducing corruption, property and land rights

Question 40

strengths of market-based policies

Answer 40

efficient allocation of resources, efficiency of production, increased consumer choice, improved product quality

Question 41

weaknesses of market-based policies

Answer 41

market failure (inability to deal with externalities such as common pool resources, insufficient provision of merit and public goods), weak institutional framework, income inequalities and poverty, informal economy, insufficient credit for poor people, inability to allevite poverty

Question 42

strengths of interventionist policies

Answer 42

correcting market failures, investment in human capital, development of stronger institutions, redistributing income and reducing poverty, industrial policies, provision of a stable macroeconomic environment

Question 43

weaknesses of interventionist policies

Answer 43

need for government budget funds, excessive bureaucracy and inefficiency, possible protection of inefficient producers, allocative inefficiency, corruption, poor governance, possible influence of elite groups on political decisions

Question 44

relative poverty measurements

Answer 44

minimum income standards, Multidimensional Poverty Index

Question 45

absolute poverty measurement

Answer 45

poverty line

Question 46

causes of economic inequality

Answer 46

unequal opportunities, low human capital levels, low resource ownership levels, discrimination, unequal status and power, government tax and benfit policies, technological change, globalisation, market-based supply side policies, high abnormal profits of firms with large market power, unemployment, geography, increases in pay of certain occupations, poverty cycle

Question 47

impact of economic inequality

Answer 47

decreasing economic growth, low living standards, reduced social and political security

Question 48

policies to reduce income inequality

Answer 48

progressive taxes, human capital investment, transfer payments, provision of merit goods, universal basic income, policies to reduce discrimination (legislation), government intervention ((minimum wages and price controls)

Question 49

direct taxes

Answer 49

personal income tax, corporate income tax, wealth tax, social insurance contributions

Question 50

indirect taxes

Answer 50

general expenditure tax/value-added tax, excise taxes, tariffs

Question 51

tax types

Answer 51

regressive, proportional, progressive