Global Economics knowledge Flashcards
benefits of free trade
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
comparative advantage theory assumptions
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
arguments for trade protection
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
argument against tade protection
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
trading bloc types
free trade area, customs union, common market
trading bloc advantages
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
trading bloc disadvantages
possible trade diversion, loss of sovereignty, unequal distribution of gains and losses
causes of changes in exchange rates
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
intervention to maintain a fixed exchange rate
exchanging official reserves, increases in interest rates, borrowing from abroad, efforts to limit imports
balance of payments
current account, capital account, financial account
current account
balance of trade in goods, balance of trade in services, income, current transfers
capital account
capital transfers, transactions in non-produced non-financial assets
financial account
foreign direct investment, portfolio investment, reserve assets, official borrowing
effects of depreciation
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
effects of appreciation
lower inflation, reduced economic growth, increased unemployment, decreased value of foreign debt, increased living standards, current account deficit
advantages of monetary union
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
disadvantages of monetary union
loss of domestic monetary policy, loss of exchange rates as a mechanism for adjustment, differing impacts of monetary policy on each country
consequences of current account deficit
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
consequences of current account surpluses
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)
policies to correct current account deficit
expenditure reducing policies (reducing aggregate demand), expenditure switching policies, trade protection, depreciation, supply-side policies to increase export competitiveness
Marshal-Lerner condition
depreciation improves trade balance only if the sum of PED of imports and PED of exports is larger than 1
signle economic development indicators
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)
composite economic development indicators
Human Development Index, Gender Inequality Index, Happy Planet Index
economic barriers to development
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
political barriers to development
weak institutional framework (legal system, ineffective taxation system, banking system, property rights), lack of good governance and corruption, unequal political power and status
strategies for economic growth and development
international trade strategies, diversification of economic activity, market-based policies, interventionist policies, foreign direct investment, foreign aid, debt relief, institutional change
international trade strategies
import substitution, export promotion, economic integration, trade liberalisation
import substitution
high protection of domestic firms, overvalued exchange rates (to import capital cheaply), too much government intervention in the economy
export promotion
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
export promotion advantages/disadvantages
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
import substitution advantages/disadvantages
encouragement of capital intensive production, deterioration in balance of payments, negative effects on employment and income, limited possibilities to grow in the long term
diversification of economic activity
sustained increases in exports, development of technological skills, reduced vulnerability to price volatility, use of domestic primary commodities
market-based policies
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
interventionist policies
redistribution policies, provision of merit goods (education, health services, infrastructure)
redistribution policies
tax policies (increasing progressivity, expanding indirect taxes on luxury goods, reducing tax evasion), transfer payments ( reduce poverty, improve acess to healthcare), minimum wages
foreign direct investment advantages
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
foreign direct investment disadvantages
possible environmental degradation, promoting inappropriate consumption patterns, MNC can use their economic and political power to promote policies that work against economic development
foreign aid
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
institutional change
microfinance (cons: high interest rates, contribute to informal economy), mobile banking, reducing corruption, property and land rights
strengths of market-based policies
efficient allocation of resources, efficiency of production, increased consumer choice, improved product quality
weaknesses of market-based policies
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
strengths of interventionist policies
correcting market failures, investment in human capital, development of stronger institutions, redistributing income and reducing poverty, industrial policies, provision of a stable macroeconomic environment
weaknesses of interventionist policies
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
relative poverty measurements
minimum income standards, Multidimensional Poverty Index
absolute poverty measurement
poverty line
causes of economic inequality
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
impact of economic inequality
decreasing economic growth, low living standards, reduced social and political security
policies to reduce income inequality
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)
direct taxes
personal income tax, corporate income tax, wealth tax, social insurance contributions
indirect taxes
general expenditure tax/value-added tax, excise taxes, tariffs
tax types
regressive, proportional, progressive
