global economy (paper 2) Flashcards
what is globalisation?
Globalisation is the process of growing inter-dependence by different countries, in order to trade goods/services more freely across borders.
what are the characteristics of globalisation?
characteristics of globalisation:
Increased foreign ownership of companies / FDI (foreign direct investment)
Increased movement of labour and goods across border
Increased migration
what are the four factors contributing towards globalisation?
Containerisation – is where a vast number of goods can be transported more effectively due to large metal containers used for shipping on boats. This has allowed for economies of scale to occur, as now companies can bulk buy resources.
Growth of technology – has allowed for communication across borders to become much easier. The creation of the internet, skype, WhatsApp etc has allowed for transnational deals to be made with ease, without the need for businessmen to meet in person.
Creation of IGOs – the creation of the World Trade Organisation, in which all members must apply by its neo-liberal ideology of the free market. They help negotiate free trade agreements between countries – which allows for national specialisation to occur.
The collapse of communism – the end of the cold war between Russia and the West allowed for previous communist countries to open their markets to the world for free trade. This enlarged the global supply of labour and goods.
what is the impact of globalisation on individual countries?
(and what’s the evaluation to this?)
Comparative advantage - the process of globalisation allows for individual countries to specialise in an area of production that fits their geographics better. For example, Taiwan is the main producer of chips needed for mobile phones. They are able to specialise in this industry as their natural resources allow them to do so. As a result, electronics make up 50% of their exports. They are able to experience these due to the natural resources they possess.
^More FDI
^More employment
^More economic growth
^More efficient due to greater competition
Evaluation: However, deindustrialisation has taken place in developed countries due to production being cheaper abroad where there are less regulations. This has led to structural unemployment within countries who used to practice in these industries that have now been off shipped. It has also meant that individual countries have become reliant on one another, and therefore one countries decisions effect everyone else. For example, sanctions on Russia following their invasion of Ukraine led to cost-push inflation in the Uk due to higher oil prices.
What is the impact of globalization on the Government, and what is the evaluation to this?
Governments – Globalisation allows for higher living standards and higher incomes due to the cost of production becoming cheaper from economies of scale and specialisation. This means they don’t have to spend as much in the economy to make it more efficient and will gain more revenue in tax due to higher incomes / earnings.
Evaluation: Globalisation will lead to more negative externalities of production that the Government will have to tackle. For example, environmental issues – like the depletion of natural resources, deforestation, pollution / litter, etc. These issues may also have further help impacts in the future for their citizens – for example in China, they are encouraged to wear facemasks to avoid later implications of production down the line. Asthma has also been linked to the growth of pollution.
^structural unemployment may also occur
What is the impact of globalization on producers, and what is the evaluation to this?
Producers – Due to more competition in the market firms will have to become more productively efficient in order to stay competitive. Firms may seek out doing this through economies of scale, etc that will lower their costs for them. Globalisation also allows for supernormal profits to occur as they have a larger producer surplus to exploit – due to these lower costs.
Evaluation: Globalisation allows for TNCs to occur (transnational cooperation’s). This means these firms will experience a much larger scale of economies of scale, and possibly gain monopoly power. This makes competing against brands with such a global, well-known image hard as they are already pre-established in the market. This has led to companies dominating global markets- for example, the presence of McDonalds, KFC, etc in the fast-food industry.
What is the impact of globalization on consumers, and what is the evaluation to this?
Consumers – Due to more competition in the market (from more suppliers) cost of the goods should fall as they are pushed to stay competitive and be the most economically efficient. This means consumers may have more purchasing power with their money due to the prices of goods falling.
^more consumer surplus
^more variety / better standards of living
Evaluation: However, this is dependent on the fact that these TNCs pass on this lower cost to the consumers. They may actually keep their prices the same and use their profits to pay off dividends instead. Anticompetitive behaviour can also occur through big companies colluding – which limits consumer choice. For example, when British airways colluded with virgin airways to fix fuel surcharges.
^if domestic firms have to shut down, this won’t increase variety, but rather remove it
What is the impact of globalization on the environment, and what is the evaluation to this?
The environment – globalisation has led to mass exploitation of natural resources. This has led to an increase in pollutants like methane gas, etc which has led to an increase in sea levels, wildfires, etc. It has also led to the extinction of certain animals, effecting the food chain in the wild. Changing weather has led to confused migration patterns from birds, etc.
^more pollution from production (methane)
^more natural resources exploited
^worse air quality / associated health risks
^erosion of landscape
Evaluation: Globalisation has allowed for global summits between nations to tackle the climate crisis more effectively – for example, the Paris agreement (2015) which set the target for 2 degrees. Globalisation has also led to a transfer of ideas / innovation – that has allowed the creation of environmentally friendly technology / power sources to occur – like wind turbines, solar panels, etc.
^foreign aid is also given to developing countries for “sustainable growth”
What is an absolute advantage?
Absolute advantage – occurs when a country is able to produce a product using fewer factors of production than any other country.
What is an comparative advantage?
Comparative advantage – a country should specialise where it has the fewest opportunity costs, and then trade with another nation. By specialising, the volume of of production increases, and excess supply can be exported.
what are the assumptions in the theory of comparative advantage?
- There are no transport costs - it does not account for moving the goods/services between countries. Depending on a nation’s location this is more or less of a problem
- There is perfect knowledge - each country knows what it has a comparative advantage in & also the comparative advantages of other countries
- assumes no barriers to trade - it assumes that there is no protectionist policies in place by a country that is restricting their ability to trade with one another.
How can comparative advantage be shown on a PPF?
How to draw: you write the two different goods on either axis. You then plot how much one country can make of that good on either side.
To find who has the comparative advantage on a PPF diagram, you go to the axis where there is the biggest gap between the two countries. You then see who is producing more in that product, and whoever that country is, they have the comparative advantage.
In this case, the largest gap is on the x axis. Country A is producing more than country B in batteries, and therefore country A has a comparative advantage over country B in battery making.
^The theory: Two countries will only trade their two goods if their rate of exchange is suitable. This rate must lie between the opportunity cost ratios of production. For India it is only worth selling to the Uk if what they get back in return is more than what they could’ve produced themselves with the resources from that 1 computer. India will need at least 2 tonnes of cotton in return for each computer they sell to the Uk, otherwise there would be no point selling to the Uk in the first place. Trade therefore must be mutually beneficial.
what are the 4 factors that influence the pattern of trade between countries?
Comparative advantage – Firms will seek to profit maximise. Where it makes sense for firms to increase production due to natural advantages (like natural sources) firms will. Equally where it makes sense to outsource production to another country that is more efficient, firms will. Over time this changes what countries choose to produce and outsource.
Impact of emerging countries – emerging countries in recent years (like China and India) have changed trading patterns as it has opened up new producers to the world market. Countries shifted their trade to these countries once they found out how they were more efficient at production (usually due to their little regulations).
Growth of trading blocs / the WTO – such agreements result in trade creation – this occurs when production shifts from a high-cost country to a low-cost country. This is the most efficient decision.
Changes in relative exchange rates – if a country’s exchange rate appreciates then its exports become more expensive and its imports cheaper.
what are the advantages of global trade?
Trade creation - more output is created on the global market due to countries exercising their comparative advantage.
^This will lead to greater productive efficiency (micro) as countries can now specialise in a specific area of production that suits their geographics, natural resources, etc best
^This will lead to lower prices as competition increases
Can fight domestic monopolies. A domestic monopoly would be the only firm in the market within your own country. They would then have price setting power and start to manipulate prices and output to raise their supernormal profits. However if you open up the market to the international market, then domestic monopolies will have to become more allocatively and productively efficient again in order to remain competitive with their foreign competitors.
Greater consumer choice - consumers can now import a wider range of goods and services giving them a larger choice in what they consume
Improved living standards - tackles absolute poverty by allowing for wealth creation - more employment and job prospects
what are the disadvantages of global trade?
Global monopolies emerge (TNCSs) – As a company starts to off-shore production to other countries their costs decrease, and as they start to open up in other countries their brand image and reputation increases, thus making it hard for other companies to open. For example: the cola industry globally is dominated by Coca Cola and Pepsi.
^TNCs exploit the countries that they operate in and send their profits elsewhere
^TNCs place pressure on the government of third world countries they are operating in to give them tax relief / looser regulations, otherwise they threaten to leave their country alt together
Exposure to external shock – a change in one countries economy will affect everyone. For example, sanctions on Russia following their invasion of Ukraine led to cost-push inflation in the Uk due to higher oil prices. Another example would be the financial crisis of 2008, which originated in America, yet negatively affected much of the West.
The current account – a deficit may emerge for countries who are importing more than they are exporting frequently. This usually occurs in the developed world due to higher incomes, and it usually happens in the developing world as their own goods are not competitive enough and they need to import vital goods.
Structural unemployment in your own country - your domestic markets may suffer if they struggle to compete with the low prices on the global market. Infant industries may struggle to make a profit and sunset industries may have to close abruptly - causing mass unemployment in your country.
environmental concerns - as more goods are being created due to specialisation across the globe, this will lead to more natural resources being extracted and more finite resources being used. More fossil fuels will be needed for the manufacturing stage of production and more natural landscape will be eroded due to urbanisation. This will have associated negative externalities like health care problems from pollution, poor water quality, loss of habitat, etc.
what is meant by the terms of trade?
The terms of trade show when it makes the most sense for two countries to trade with one another. Trade needs to be mutually beneficial in order for it to take place. For example, if it costs China 1 phone to make 5 TVs, they’ll want to make sure if they trade a phone they get more than 5 TVs for it. If it is anything lower, they may as well just make the goods themselves, as its cheaper. The other country in question will also have their own criteria that needs to be met in order to trade- therefore they both must find a realm where they’d be happy to trade with one another. For example:
1 Phone < trade < 6 TVs
^the realm they’d be willing to agree on.
The terms of trade therefore shows how expensive exports are in terms of imports. For the terms of trade to improve, export prices would either go up, or import prices fall – this way you can buy more imports with the value of your exports.
what is the calculation to the terms of trade?
terms of trade = index of average exports prices divided by index of average import prices times 100
what is meant by an index?
An index number is a figure reflecting price or quantity compared with a base value. The base value always has an index number of 100. Therefore the index can be understood as a percentage change.
what are the factors that influence the terms of trade?
Relative inflation rates: Inflation increases the price of goods/services within a country. This means that their price is now more expensive to the rest of the world. If the exports are price inelastic in demand this will improve the terms of trade, if elastic then it is likely to worsen the terms of trade
Relative productivity rates: continuous improvements in productivity can lower costs & these can be passed on in the form of lower prices. Lower prices for export products will mean that the terms of trade will deteriorate i.e. fewer imports can be bought with one unit of exports
Changes in exchange rates: exchange rates constantly change the price of exports & imports. If prices change then the terms of trade between the two countries change. Specific data would need to be provided in order to determine if the terms of trade have improved or deteriorated for each trading partner
what is the impact of a change in the terms of trade?
The country can either buy less or more imports depending on how well their exports are performing - this will effect the country depending on how reliant they are on them.
^worsening of the current account
^may have to borrow money to buy their imports now if their terms of trade cannot fund it anymore
^less variety available
what is a trading bloc?
Trading bloc – an agreement between countries to reduce / remove barriers to trade.
what are the 4 types of trading blocs?
Free trade areas – where a group of countries agree to remove trade restrictions between themselves yet can keep their own restrictions on other countries outside of the trade agreement. For example, NAFTA (made up of the USA, Cananda and Mexico). In this agreement, they do not affect how each other interacts with other countries. For example, the USA has a complete embargo on Cuba, yet Mexico has free trade with Cuba.
Custom unions - where a group of countries agree to remove trade restrictions between themselves and agree to common tariffs to be shared for all other countries outside of the custom union. They therefore have no tariffs for themselves yet have common tariff barriers for external countries. For example, the European union is a custom union who all share the same tariffs.
Common markets – The same thing as a custom union, yet additionally all factors of production (like land, labour, capital and enterprise) are all also traded freely across their borders. The Eu is also a common market as they all for immigration across all borders.
Monetary unions – has all of the perks of a custom union and a common market, yet also establishes a common central bank which issues a common currency for all members. It also controls the monetary policy for all members in the monetary union. For example, the eurozone, in which all members share the same currency (the euro).
what are the conditions necessary for a monetary union to succeed?
- similar trade cycles - as they share the same interest rate, The trade cycles of member countries should be similar so as to avoid tensions with the union. For example: During the Eurozone crisis of 2009, Ireland had a very different economic structure than the rest of the monetary union at the time, and therefore couldn’t adjust the interest rate to tackle their decline.
^Equally, a monetary union doesn’t influence individual countries fiscal commitments. This can be a problem for the amount of debt a country may accumulate through their chosen fiscal policy. For example, Greece’s debt made up 150% of their GDP - effecting their fiscal commitments, and thus economy. in this case, it would be good to have control over their monetary policy to even out the effects - yet they didn’t. - movement of labour - Labour should be able to move freely without any major barriers e.g. language. The main languages of the Eurozone are English, French & German but language is still a limiting factor.
what are the benefits of regional trade agreements?
- Shifts production of certain goods from a high-cost country to a low-cost country; improving productive efficiency and generates higher incomes due to greater profit that can be made once costs are lower
- Common tariffs simplify trading conditions / agreements
- greater competition may tackle pre-existing monopolies already present in your domestic market - they are now forced to become efficient as they are competing with other companies abroad
what are the disadvantages to trade agreements?
- Trade diversion may occur – countries re-allocate production to countries within their trade agreement, yet the other country they were trading with beforehand (who is not in this trade agreement) may had been more economically efficient. Thus, trade transfers from a country with a lower opportunity cost to a country with a higher opportunity cost for the sake of this agreement.
- Structural unemployment may occur in your own country due to shifting sectors to abroad
- annoys the WTO
what is meant by trade liberalisation?
Trade liberalisation – promoting free trade and removing barriers.
how does the WTO achieve trade liberalisation?
- Implements trade agreements – the WTO negotiates and does the research behind trade agreements that t then gets states to sign. For example, the GATT (general agreement on tariffs and trade), which managed to remove barriers by excepting common standards.
- Resolves trade disputes – The WTO has an impartial panel for countries to bring their trade grievances to. This helps to avoid trade wars by providing an impartial body that can give its verdict. If a country will not comply with their verdict, they can authorise the other country to also use anti-competitive practices against them in retaliation. This acts as a deterrent to ignoring the WTO. They also monitor trade policies and makes sure each member state complies with their policies. It also conducts regular trade policy reviews of member states to identify where trade liberalisation could be better/further achieved.
- Providing technical assistance – The WTO provides assistance to developing countries to open themselves up to free trade through capacity building and technical assistance. This includes advising them on how to build their infrastructure, etc.
what are the possible conflicts between regional trade agreements and the WTO?
The WTO has an anti-discrimination policy. All countries should be treated equally in the possibility of trade. However regional trade agreements go against this in two main ways:
1) special treatment regarding tariffs - countries in a trade agreement will reduce tariffs for each other to make trade easier for themselves. However, this places member states at an advantage during trade against the rest of the world as their cost of production are now cheaper.
2) “rules of origin” - this help to determine the “nationality” of an imported / exported good, to see whether it qualifies for reduced tariffs or not.
what are the reasons for protectionist policies? (types of restriction)
To protect infant industries – to protect new firms that have just entered the industry that would not be able to compete currently due to the mass of global competition. Once they are well established, protectionism is removed.
To protect sunset industries – These are firms at the end of their life cycle in an industry – they are due to shut down in the foreseeable future. However, the Gov. may protect them in the meantime from international competition to ensure their closure is not abrupt and limits the economic damage on workers and providers.
Strategic industries – some industries are essential in order for the economy to operate most effectively. Therefore, the Government may protect a current industry (like energy, defence, etc) incase relations with another country broke down who previously supplied such good. For example, British steel is a Strategic industry.
Protect employment – when firms outsource to other countries for production (as it is cheaper) this will make cyclical unemployment occur in the country of origin. The Government may instead subsidies such industry, so it does not have to go abroad, and thus saves workers their jobs.
Avoid possibility of being harmed by any external shock - if a country becomes too reliant on another country for a vital resource (like oil, etc) then when something goes wrong in that country (like war, natural disaster) your country will also be effected
what is a tariff? draw the diagram
Tariff – is a tax on imports. Domestic producers must pay the tariff when they import the good into the country, this raises their cost of production. Firms will pass on this increased cost onto consumers by raising their prices. These higher prices allow some domestic firms to increase their output (law of supply).
draw the diagram
Probably be easier to refer to your book, but here is the analysis anyway
The consumer surplus was originally ABC. Since the tariff, it has contradicted to ADE.
The producer surplus was originally CHG. Since the tariff, it has now expanded to EFG.
There is welfare loss at the two smaller triangles.
The Box behind FD is the tax the government gains from the tariff.
^Quantity demanded contracts from Q2 to Q4
^the quantity supplied increases from Q1 to Q3
^The new level of imports has reduced from Q1 – Q2 to now Q3 - Q4
what is quota?
and the evaluation?
Quota – is a physical limit on imports. Domestic firms benefit as the demand for these good remain in the economy, and they can now be the ones to supply them, this may also increase the level of employment within the economy.
draw diagram
Evaluation: imports are usually the cheaper alternative for a producer within the domestic market. As cheaper imports are now limited, this will raise their market price, causing a shortage of that good within the country. If this imported good is one British firms will struggle to make themselves as a response to the quota, the quota will hinder economic growth.
^Equally, there isn’t any direct tax revenue from an import quota in comparison to a tariff.
how is a subsidy to domestic producers a form of restriction on international trade?
Subsidies to domestic producers - A subsidy will lower the cost of production for domestic firms. This means they can increase output and pass on their lower cost to customers by decreasing their prices. This makes their goods more competitive during trade, enabling for demand to shift to them, rather than abroad.
draw subsidy diagram
what are the non-tariff barriers?
Non – tariff barriers – Are less obvious barriers to trade. Examples can include:
Health and safety regulations – the EU put a new health and safety regulation on the amount of aflotoxins that could be present in nuts imported in. Aflotoxin levels are naturally higher in the southern hemisphere due to their climate, thus this effectively blocked imports for nuts from the southern hemisphere.
Product specification – Canada specified that all jam imported needed to be in a certain size container. Many countries do not usually use the specific sized jar stated, and therefore this protected Canadas domestic jam industry as they do use that size of jar.
Environmental regulations – In 2021 the EU and the USA put in new regulations to limit the amount of imports of “dirty steel” - this was steel that uses coal power stations, which are prevalent in China. This essentially banned imports of steel from China in a more discrete way.
what is the impact of protectionism on all stake holders in the economy?
DEPENDS ON PED!!!!!!!
domestic firms:
- larger consumer base
- more revenue from a shift of demand onto them rather than foreign firms
-greater stability - can plan for investment
However,
-may rely on imported raw materials
-off-shoring their production may had been cheaper
- may promote domestic monopolies, thus limiting competition
consumers:
-cheaper prices -> more purchasing power with their money
-locally sourced -> maybe of higher quality / more fresh (if in regards to agriculture)
However,
-less variety
-may raise prices if firms now have to import raw materials at a higher price
what is meant by exchange rate?
Exchange rate – the value of one currency in terms of another.
what is the difference between a floating, managed and fixed exchange rate?
- floating – exchange rate is determined by supply and demand in the foreign exchange market. Governments / central banks do not directly interfere with the rate, allowing it to fluctuate freely.
- fixed – The Government / central bank sets a specific exchange rate that they fix through artificial means – like selling their currency reserves or imposing legislation.
- managed – Has elements of both a free floating and fixed exchange rate. The currency may fluctuate according to market forces within a specific band. for example, Chinas exchange rate is able to fluctuate by 2%. authorities occasionally intervene the fix the exchange rate.
what is the distinction between revaluation and appreciation of a currency?
Revaluation – an increase in the exchange rate due to government intervention. It is a direct policy.
Appreciation – an increase in the exchange rate due to market forces.
what is the difference between devaluation and depreciation?
Devaluation – a fall in the exchange rate due to government intervention. It is a direct policy.
Depreciation – a fall in the exchange rate due to market forces.
what are the factors influencing floating exchange rates?
- Relative interest rates – this influences the flow of hot money (money that flows between countries to earn higher interest) between countries. If the Uk increases its interest rates, then the rewards for saving in the Uk are higher, so a flow of hot money will occur – which are foreigners demanding more £ to make a profit.
- Net trade – If Uk exports are very competitive, then more will demand the £ in order to buy our exports. This will appreciate the currency. If the Uk is importing a lot into the country, then we’re having to sell our £ in order to buy foreign currencies and this will depreciate the £ due to a larger supply of it out on the market.
^Equally Net investment like FDI will also influence the value of your currency.
**WPIDEC - weaker pound imports dearer, exports cheaper
- Speculation – Traders buy a currency expecting it to go up in value soon. They will then sell the currency once it is higher to make a profit. This can drive short-term fluctuations depending on how confident traders are in the future of a currency.
what is government intervention to influence the exchange rate?
Changing interest rates – if the central bank wants to appreciate the value of the £, it will raise interest rates to attract hot money into the country. Hot money is where more people demand the £ in order to make a profit through interest.
Buying and selling currency in the foreign market – The Central Bank can change the demand and supply of its currency through its currency reserves. These reserves are made up of both their own currency but also other foreign currencies. If they want to depreciate the £, they will sell their own currency and buy others. However, if they want to appreciate the £ they will buy more £ using their foreign currency reserves.
Improve the competitiveness of your countries exports - for example the government could subsidises domestic firms in order to supply more at a cheaper price, this will increase the demand for our exports and thus increase the demand for the £. The more demand there is for the £ the more it will appreciate.
what is the J curve and how does it influence the current account?
The J-curve shows how an initial depreciation of your currency will actually worsen your current account before it improves it, due to a difference in elasticities in the short-run and long-run.
draw diagram
^In the short-run, demand elsewhere is inelastic for many different reasons: time lag for consumers to notice the change, companies already in a contract with other firms, etc. Therefore the current account will become worse as your currency is worth less, yet you are still importing lots and not exporting much - so your currency cant buy you as much imports as it once was able to, costing you more.
However in the long-run, firms are able to respond to the change in the exchange rate and start demanding your exports as it is cheaper for them. Therefore the current account will improve as more foreign firms will start to demand the Uk’s exports, so more firms will need to buy the £ in order to buy the export.
What is Marshall Lerner condition?
Marshall Lerner condition -
states the conditions that must be met for a depreciation of your currency to actually improve the current account.
The equation:
PED of imports + PED of exports > 1
^If added together they are both larger than 1, then your current account will improve. However if it’s not larger than 1, then the depreciation of your currency will actually worsen your current account.
what are the impacts of a change in exchange rates?
Economic growth / employment – Net exports are a component of AD. Therefore, a depreciation (that results in an increase in exports) will lead to economic growth. Unemployment is therefore likely to fall as more labour is a derived demand and thus more workers are needed to produce the increase in goods demanded. Whereas an appreciation may have the opposite effect.
Inflation – in the currency depreciates, cost-push inflation is likely to occur as the price of imported raw materials has now increased. Net exports are also a component of AD and therefore if a deprecation occurs this may result in an increase in exports which will lead to an increase in AD – possibly leading to demand pull inflation. An appreciation will have the opposite effect.
FDI (foreign direct investment) flows – depreciation of a currency makes it cheaper for a foreign company to invest in the country and therefore FDI will increase. This is because the money invested is worth more when the currency has depreciated. An appreciation will have the opposite effect.
what is International competitiveness?
International competitiveness – how well a country’s good competes in the international market. Competitiveness can change overtime.
what are the 2 ways to measure international competitiveness?
- Relative Unit labour costs – the total wages in an economy divided by the total output. This will show much labour needs to be paid in order to create 1 unit of good. You can then compare this figure with another countries. If the Uks labour cost is lower than Frances, then it is more competitive in the global market.
- Relative export prices – this is the ratio of one country’s export prices relative to another. Lower relative export prices indicate greater competitiveness as it means that country produces at a lower price in the international market.
^Relative productivity rates influences this
what are the factors influencing international competiveness?
Relative rate of inflation – inflation rises the price of goods / services in a country. If inflation increases in a country, then other people who were buying their exports now have to pay higher prices for them, this worsens competition as now your exports are not as competitive.
Relative productivity – a rise in output per worker relative to other countries will lower your production per unit costs and thus increase competitiveness from your lower prices.
Relative amounts of investment - if your country has a lot of investment, then more output can be produced at a more sustainable rate in the long-run. This will maintain confidence in the market.
what are the benefits of international competitiveness?
Export led growth – (x-m) is a component of AD, and therefore an increase in exports creates more AD in the economy, leading to more economic growth.
Unemployment decreases – economic growth leads to an increase in employment as labour is a derived demand.
Standards of living improves – as incomes rise when economic growth occurs, households gain more purchasing power and therefore can access a wider range of goods / services that they couldn’t once afford.
what are problems of being internationally uncompetitive?
- Trade deficits – uncompetitive countries may have to import more than they export, worsening their trade balance.
- Unemployment – uncompetitive industries may shed jobs as firms offshore elsewhere.
what is the distinction between absolute poverty and relative poverty?
Absolute poverty – individuals cannot afford the basic goods needed to live a life worth living. These necessities include: shelter, food, water, etc. In 2022, the World Bank described absolute poverty as anyone living on less than $1.90 a day. This type of poverty is more prevalent in developing nations.
Relative poverty – where household income is a certain percentage below the median average household income in the country. The Uk defines relative poverty as a household living with less than 60% of the median house’s income. In 2022, 22% of the Uk was in relative poverty. This type of poverty is more prevalent in developed nations.
what are the causes for a change in absolute poverty? (within a country)
- Economic growth – there is a strong correlation between economic growth and falling absolute poverty rates. This is because economic growth generally leads to higher household income.
- generosity of the welfare system - if the welfare system is fairly generous in a country, then when people lose their jobs or come into hardship, this wont automatically mean that they will become homeless, etc. The welfare system may support families to get back on their feet and make sure they can still afford basic necessities like food, shelter, etc.
^This protects the most vulnerable people in society – for example, pensioners, the unemployed, children, etc. - The business cycle - this is the natural fluctuations of an economy into boom and recession - it represents an on going fluctuation in GDP.
^During the recessionary stage of the business cycle, unemployment will be higher and confidence will be low in the market, and less tax revenue collected. it is at this time, absolute poverty within your country is likely to be at its highest.
what are the causes for a change in relative poverty?
- legislation - like the minimum wage. An introduction of the minimum wage will lift many out of relative poverty as now they are guaranteed a higher wage, and will be able to afford more goods with their money. 1 in 9 workers in the Uk receive the minimum wage.
- education / apprenticeships / job creation schemes - better quality education will provide better job prospects for future generations, this will lead to higher paying jobs and lift them out of relative poverty. Equally, job creation schemes (like supply-side policies) will provide families with a more stable income that they will be able to use to pay their bills.
- Unemployment – increased labour market flexibility has led to an increase in 0-hour contracts and part time jobs – these are unreliable in the long-term scheme of things. This can affect workers when there are times of no guaranteed work. A short number of hours worked can lead to individuals falling behind in debt repayments or rent, which worsens their issue.
what is the difference between wealth inequality and income inequality?
+ what is included when we consider income
Wealth inequality – the difference in the amount of assets owned by households.
Income inequality – the difference in the income households generate. Income can be in the forms of: rent, wages, interest and profit.
