Macro Flashcards
1
Q
Absolute advantage
A
When a country can produce goods and services at a lower unit cost than other countries
2
Q
Absolute poverty
A
Situation in which individuals have insufficient income to purchase the basic necessities for survival
3
Q
Accelerator
A
Theory by which the level of investment depends on the rate of change in national income
4
Q
Aggregate demand
A
Ability and willingness of all economic agents to spend in the economy
5
Q
Aggregate supply
A
Total supply of all goods and services produced within an economy at a given overall price at a given time
6
Q
Appreciation
A
Rise in the value of a currency in terms of another
7
Q
Automatic stabilisers
A
Changes in tax revenue and state spending arising automatically as the economy moves through different stages of the economic cycle
8
Q
Average tax rate
A
Tax paid divided by taxable income
9
Q
Balanced budget
A
When government expenditure is equal to taxation receipts
10
Q
Balance of payments
A
Record of the transactions conducted between residents of a country and the rest of the world
11
Q
Barter system
A
System of exchanging one product for another without the use of money as a medium of exchange
12
Q
Broad money
A
Total amount of money held by households and companies in the economy including all narrow money and less liquid forms
13
Q
Budget deficit
A
Occurs when government expenditure outweighs government taxation receipts
14
Q
Budget surplus
A
Occurs when government taxation receipts outweigh government expenditure
15
Q
Capital government expenditure
A
Government spending on capital projects that leaves thee government with assets - schools,factories and roads
16
Q
Capital-output ratio
A
Amount of capital needed to produce a unit of output
17
Q
Central bank
A
Organisation charged with the responsibility for maintaining price stability by making monetary policy decisions
18
Q
Ceteris paribus
A
Other things being equal - the assumption that everything else stays the same
19
Q
Circular flow of income
A
Ways in which income, money, goods and services flow in an economy
20
Q
Claimant count
A
Measure of the number of people registered as unemployed and claiming Jobseeker’s Allowance
21
Q
Comparative advantage
A
When one country produces a good or service at a lower opportunity cost than another
22
Q
Consumption
A
Spending by households on goods and services
23
Q
Contractionary monetary policy
A
Government policy to increase the rate of interest/ decrease money supply in order to reduce economic activity and the rate of inflation
24
Q
Crowding out
A
Government spending crowds out private sector investment by increasing the rate of interest, which increases the cost of borrowing for private firms
25
Current account
Transactions in goods and services between the residents of a country and the rest of the world
26
Current government expenditure
Government spending on day-to-day running costs e.g. buying raw materials, wages of public sector workers s
27
Customs union
Agreement between member countries to abolish tariffs and quotas and adapt a common external tariff from non-member countries
28
Cyclical deficit
Budget deficit that occurs over the course of the economic cycle. It appears in a downturn and disappears during an upswing
29
Cyclical unemployment
Unemployment that arises throughout the course of the economic cycle, during a recession
30
Deflation
Decrease in average price level measured by the weighted basket of goods
31
Demand-deficient unemployment
Unemployment that arises because of a deficiency in aggregate demand in the economy I.e. the equilibrium level of output is below full employment
32
Depreciation
Fall in the value of currency in terms of another
33
Deregulation
Removal or regulations to open up the industry to competition
34
Developed economy
Country that has industrialised and is reliant on the tertiary sector of production and has high levels of average income measured by GDP per capita
35
Developing economy
Country with reliance on the primary sector of production and low levels of average income measured by GDP per capita
36
Discouraged workers
Those who have been unable to find employment and work are no longer looking for work
37
Discretionary fiscal policy
Government planned and autonomous expenditure that involves a policy decision to later government expenditure or taxation rates
38
Discretionary income
Income remaining once tax and essential housing costs, such as mortgage payments, have been paid
39
Disinflation
A fall in the rate of inflation
40
Economically inactive
Working age people who are neither in employment nor unemployed and so are not part of the labour force
41
Economic cycle
Fluctuation of the economy in periods of contraction and expansion around its underlying trend rate, following a regular pattern
42
Economic development
Rise in peoples economic well-being and quality of life
43
Economic growth
Change in national output over times as measured by GDP or GNP
44
Economic integration
Process of becoming a member of a trading bloc
45
Economic union
Occurs when two or more countries share a common monetary and fiscal policy
46
Emerging economy
Economy that is making the transition from from less developed to more developed, often categorised by rapid rates of growth and industrialisation
47
Employment rate
Proportion of the working age population in work
48
Exchange rate
Price if one currency in terms of another
49
Expansionary monetary policy
Government policy to decrease the rate of interest/increase money supply in order to stimulate economic activity and increase the rate of inflation
50
Expectations
Views that economic agents have about what will happen to the economy in the future
51
Exports
Goods and services that firms sell overseas
52
Financial sector
Why in which financial capital is channeled to the correct area of the economy
53
Fisher equation of exchange
The relationship between nominal and real interest rates under inflation MV=PY
54
Fixed exchange rate system
When the exchange rate is determined by a central body, either the government or the central bank
55
Floating exchange rate
When the exchange rate is determined by the market forces of demand and supply
56
Foreign direct investment
Investment undertaken in one country by companies based in other countries
57
Free trade area
Occurs when countries agree to remove import tariffs and other barriers to promote trade in goods and services
58
Frictional unemployment
Unemployment associated with job search I.e. those who are between jobs
59
Full employment
When all those who are economically active and are willing and bale to work have a job
60
GDP per capita
Gross domestic product per head
61
Geographical immobility
Barriers to the movement of workers between different regions
62
Gini coefficient
Ratio of the area between the Lorenz curve and the line of equality and the area underneath the line of equality
63
Globalisation
The increasing economic integration of national economies into the global economy
64
GNI per capita
Dollar value for a countries final incomes divided by its population
65
Government budget
Balance between government receipts and expenditure
66
Government expenditure
Spending by the government on goods and services such as the NHS
67
Harrod-Domar model
Economic model which suggests that economic growth relies on two things: the level of saving and capital-output ratio
68
Hot money
Short term capital flow that responds to changes in relative interest rates
69
Human capital
the quality and skills base of labour
70
Human development index
Composite indicator of economic development Mazda up of three parts: GNI per capita, life expectancy at birth and mean and expected years of schooling they range from 0 to 1
71
Hyperinflation
Excessively high trade of inflation
72
Imports
Goods and services that households and firms but from overseas firms
73
Income
Flow of money over a period of time
74
Income inequality
Unequal distribution of income
75
Inflation
Increase in the average price level measured by the weighted basket of goods
76
Injections
Routes for money to enter of circular flow of income including through investment, government expenditure and exports
77
Interest rate
The price of money, the cost of borrowing and reward for saving
78
International competitiveness
Ability of a country to compete with other nations, determined by price and non-price factors
79
International Monetary Fund
International organisation of 189 countries that encourages global monetary cooperation and financial stability and facilities international trade
80
International trade
Process of exchanging goods and services between countries
81
Inter-regional trade
Trade between one region and another
82
Interventionist policies
Policies by which the government intervenes to stimulate aggregate supply
83
Intra-regional trade
Trade within a region
84
Investment
Spending by firms on goods and services to be used in future production
85
Involuntary unemployment
When an individual would like to accept a job at the going wage rate but is unable to find employment
86
J-curve effect
Situation following a devaluation in which the current account deficit moves further into deficit before improving
87
Keynesian approach to aggregate supply
One AS curve can show both the short run and long run
88
Labour force survey
Measure of percentage of the workforce who are without jobs but are available for work, looking for work and willing to work
89
Labour market flexibility
Ability of workers to move between occupations and industries in order to respond to changes in wages and conditions of work
90
Labour market participation rate
Proportion of working age people who are economically active (in employment or actively seeking employment)
91
Labour productivity
Measure of output per worker or per hour
92
Laffer curve
Illustrates the optimal rate of tax
93
Leakages
Routes for money to leave the circular flow of income including through savings, taxation and imports
94
Liquidity
How easily an asset can be turned into cash without a financial loss
95
Liquidity trap
When a reduction in the interest rate no longer stimulates economic activity beacause their is too much liquidity in the system
96
Long run aggregate supply
The maximum that can be produced with all the factors of production in an economy
97
Lorenz curve
Illustrates income and wealth distribution, making it an effective way of showing inequality of income within and between countries
98
Macroeconomic equilibrium
Point at which aggregate demand equals aggregate supply
99
Macroeconomic indicators
Used by police makers to monitor the performance of an economy. They are associated with the targets of macroeconomic policy: economic growth, rates of inflation, unemployment and the balance of payments
100
Marginal efficiency of capital theory
Negative relationship between interest rates and the rate of private sector investment - the higher the rate of interest, the lower the return on investment
101
Marginal tax rate
Change in tax paid divided by change in taxable income
102
Marshall-Lerner conditions
States that a currency devaluation will only be beneficial if the combined price elasticities of demand for both exports and imports is greater than 1
103
Microfinance
Banking service for those who are prohibited from accessing traditional financial services
104
Monetary policy
Manipulation of the money supply, interest rate, exchange rate and the amount of credit available
105
Monetary transmission mechanism
Process by which a change in interest rates affects aggregate demand and inflation
106
Monetary union
Occurs when two or more countries share a common currency and a common interest rate set by common central bank
107
Money demand
Amount of money people are willing to hold
108
Money supply
Amount of money in the economy
109
Multinational corporations
Companies whose production activities are carried out in more than one country
110
Narrow money (M0)
All physical money coins and notes ad other money equivalents in circulation
111
National debt
Total amount of government debt based upon accumulated budget deficits
112
National expenditure
All the spending by households, firms and government over a period of time
113
National income multiplier
Ratio of change in equilibrium real income to the autonomous change that brought it about
114
National output
Value of all the output (goods and services) produced in an economy over a period of time
115
Natural rate of unemployment
Proportion of workers who are voluntarily unemployed when the labour market is in equilibrium
116
Neoclassical approach to aggregate supply
Approach to aggregate supply in which there is a short run curve and a long run curve (output does not change with price level)
117
Net exports
Exports minus imports
118
Nominal GDP
Gross domestic product at current prices not taking into account inflation
119
Nominal values
Wales unadjusted for inflation, at current prices
120
Non-accelerating inflation rate of unemployment
Rate of unemployment consistent with constant rate of inflation
121
Occupational immobility
Barriers to workers changing occupations
122
Output gap
Difference between the actual level of real GDP and the full employment level
123
Phillips curve
Economic model that demonstrates the trade-off between inflation and unemployment
124
Prebisch-singer hypothesis
States that the terms of trade of developing countries reliant on primary sector production will decline over time as the price of primary goods relative to manufactured goods fall
125
Primary income
Income generated from UK nationals employed abroad and UK firms that have invested overseas
126
Privatisation
Transfer of an industry from public and private ownership and control
127
Productive capacity
Supply capacity of the economy
128
Productivity rate
Level of output produced by a factor of production (labour or capital) over a given time period
129
Progressive taxation
Proportion of income paid in tax increases as incomes rise
130
Proportional taxation
Proportion of income paid in tax stays the same as incomes rise
131
Purchasing power parity
Long run equilibrium value of one currency in terms of another
132
Quantitive easing
Process by which liquidity in the economy is increased when the central bank purchases assts from commercial banks
133
Quota
An agreement by a country to limit its exports to another country to an agreed quantity
134
Rate of interest
The cost of borrowing and the reward for saving/the price of holding money
135
Real GDP
Gross domestic product at constant prices and inflation is taken into account
136
Real values
Values adjusted for inflation, at constant prices
137
Regressive taxation
Proportion of income paid in tax falls as incomes rise
138
Relative poverty
Situation in which individuals have insufficient income to participate in the normal social life of a country, defined as having an income level below 60% of median adjusted household disposable income
139
Seasonal unemployment
Unemployment that arises during certain seasons in the year
140
Secondary income
Transactions between governments, such as bilateral aid or transfers to an international institutes, together with remittances and government transfers of social security payments
141
Secondary sector
Any industry that is involved in processing the raw materials of the primary sector to create end-products e.g. manufacturing, construction, assembly
142
Short run aggregate supply
Goods and services that firms are willing and able to produce at a given price level in the short run
143
Stagflation
Simultaneously rising rates of inflation and unemployment
144
Structural deficit
Budget deficit that persists even when the economy is at full employment
145
Structural unemployment
Unemployment that arises due to changes in the pattern of economic activity within an economy
146
Supply-side policies
A governments attempts to increase productivity and efficiency in the economy
147
Sustainable development
Economic development that meets the needs of the present without compromising the ability of future generations to meet their own needs
148
Symmetric inflation target
When fluctuations above and below the inflation target are equally weighted
149
Tariff
Tax levied on imports
150
Terms of trade
Average price of a country’s exports relative to the average price of its imports
151
Tertiary sector
Production that includes the provision of services no end products e.g. tourism, education, finance
152
Trade barriers
Government policies such as tariffs and quotes that reduce the flow of exports and/or imports
153
Trade creation
Occurs where economic integration results in high-cost domestic production being replaced by imports from a more efficient source within the economically integrated area
154
Trade diversion
Occurs where economic integration results in trade switching from a low-cost supplier outside the economically integrated area to a less efficient source within the area
155
Trade in goods
Exports and imports of physical/visible products
156
Trade in services
Exports and imports of invisible/intangible products
157
Unemployment rate
Proportion of the working age population seeking work (economically active) but that do not have a job
158
Voluntary unemployment
When an individual choose not to accept a job at the going wage rate
159
Wealth
Stock, as measurable at a date in time
160
World bank
International organisation whose main aim is to fight poverty through the provision of financing, advice and research to developing nations
161
World trade organisation
International organisation that seeks to promote free trade
162
Evaluate likely effect in the uk of an increase in minimum wage
Analysis
- increase in income > increase in consumption > increase in AD
- increase in taxation receipts > people move into higher tax brackets > reduce budget deficit or finance more spending
- decrease in income inequality
Evaluation
- income may be saved not spent
- dependent on econ cycle may have only have an effect on inflation
- costs of national wage - firms swap to capitali and increased unemployment \
Judgment
- size of increase
- timeframe
- state of economy
- other macroeconomic indicators
- increase relative to inflation
163
Evaluate whether an increase in keynsian long run supply will improve real GDP
Evaluation
- depends on position of AD ag state of macroeconomy
- size of increase
- assumes no change in AD
164
Consequences of negative output gap
- downward pressure on inflation AS>AD
- slower rates of econ growth as actual output is lower than trend rate
- unemployed factors or production - no efficient in allocating scarce resources
- incentive of policymakers to use expansionary policies
- stem from low confidence
- lack of AD deterring investment from firms
- increased unemployment
165
Evaluate whether econ growth is beneficial
Short run - actual gdp
- employment increases (depend on labour vs capital)
- material standard of living increase
- poverty decreases
- increase in tax finance gov spending
- less JSA less gov spending spent on something else
- environment - unsustainable ( damage, pollution and depletion)
- inflation
- stress - congestion and overwork
Long run - potential
- achieved with less inflationary pressure
- not achieved if lack of AD
- cause unemployment if too much spare capacity
166
Evaluate whether econ growth will always reduce income inequality
- employment increases > material standard of living > poverty decreases
- tax increases - affects distribution
- fiscal divided - funds government expenditure and supply side policies
- too much spare capacity can cause unemployment
- can only create job opportunities for high skilled workeforce
- increase in gig economy = less job security
- inflation - house prices
167
Relationship between income and consumption
- spend less than income - leakages of saving
- spend more than income - past savings or borrowing
- low-income households are likely to have high propensity to consume as they use most if not all on necessities
- high-income households are likely to have low propensity to consume as they have money left over after purchasing necessities
168
Shifts in the SRAS
Base their production decisions on the costs of production
- wage rate changes, affecting the cost of employing workers
- raw materials costs change, affecting the costs of production
- taxation rates change, affecting profitability of firms
- productivity of workers or capital changes, more or less able to produce at same cost
- Exchange rate change, affects importing raw materials
169
Shifts in LRAS
Changes in the quality or quantity of the factors of production
Land - new resources from land such as oil
- better techniques of extracting
Labour - more potential workers may join the labour market - baby boom or increase in retirement age
- better levels of education and training may make the workforce more efficient
Capital - more investment (overseas)
- technological change making it more productive
Enterprise - more start-up businesses through government schemes or legislation changes
- improvement in schools leading to better entrepreneurs
170
Impact of accelerator and multiplier on AD and economic cycle
- investment as an injection into the circular flow of income should lead to greater national income due to the national income multiplier. This rise in aggregate demand results in a higher level of investment
- national income continues to rise until the productive potential of economy is reached or the rate of economic growth slows down which cause investment to decrease
- economic growth has reached its ceiling when productive potential is reached
- economic growth has reached floor in minimum level in recession
171
Causes of output gaps
- negative output gaps are caused by actual GDP being below potential GDP when factors of production are under-utilised and some resources are unemployed. Economic shocks such, as demand-side shocks I.e Covid consumers couldn’t travel to purchase goods and household incomes fall due to fall in demand
- positive output gaps are caused by actual GDP exceeding potential GDP as factors of production are employed above normal capacity
172
Consequences of positive output gap
- Positive output gaps result in inflationary pressure as aggregate demand outstrips aggregate supply however they are not long-term events and there will bot be any long-term effects on GDP
173
Affects of development on countries
- Primary sector production has lower productivity relative to the secondary and tertiary sectors
- less developed countries are more reliant on primary sector production
- less developed countries are therefore characterised by lower total factor productivity and can be more vulnerable to volatile commodity prices on international markets.
- as economy becomes more developed it transitions to the secondary sector and sue becomes more reliant on tertiary sector
- implications for labour demand and supply and the risk of occupational immobility
174
Positive relationship between econ growth and sustainable development
- Higher GDP per capita
- improvement in public services - higher taxation can be used to fund government expenditure on healthcare and education to improve life expectancy and mean years of schooling
- greener technologies - higher rates of profitability means sims can invest into technology reduce negative externalities
175
Negative relationship between econ growth and sustainable development
- Environmental capital stock should not diminish over time - future generations should inherit a stock of resources that enables high quality of life as current generation
- good governance of resources so that all best residents, now and in future
- income and gender inequality could still exist
-Social factors such as environmental degradation and access to healthcare and education must be considered to boost occupational mobility and increase lifespan
- investment in infrastructure ( transport links and utilities) will aid geographical divides
176
Causes of inflation
- demand-pull inflation - a result of a rise in aggregate demand in excess of aggregate supply , more significant when the economy experiences a rise in aggregate demand demand at a time of full employment
- cost-push inflation - a rise in the cost of production causes prices to rise on the supply side of the economy
177
Cause of deflation
Lack of aggregate demand resulting in lower output and possibly deflationary spiral
178
Consequences of deflation
- deflationary spiral - lower prices result in households and firms delay purchases in expectation prices will lower further therefore firm reduce output unemployment rises and then lower aggregate demand more downward pressure
- reduce confidence which reduces effectiveness of any government policy measures designing to increase activity
- bad deflation will change peoples expectation and behaviour - banks are likely to experience defaults on loans and worry about households ability to pay
- deflation van increase the burden debt on households, firms and governments. The amount that has to be repaid rises in real terms and this can further reduce C+I+G
- falling prices as a result of greater total factor productivity can increase the international competitiveness of a country export which improves the current account position on the balance of payments and increases the firms output and can help reduce unemployment as AD rises
179
Consequences of inflation
- fall in value of money reduction in the real value of income and the purchasing power of income assuming incomes do not rise with the rate of inflation
- reduction in the real rate of interest and the return on savings and investments in the future
- uncertainty - about the costs of production and therefore unwilling to invest and consumers uncertain about value of income and could be confused whether to consumer or save
- loss of international competitiveness of exporting firms, inflation can erode the price competitiveness of exports and it also reduces the price competitiveness of domestically produced products compared to imports
- fiscal drag - people are dragged into higher tax brackets so pay higher proportion of income and fall of disposable income
180
Causes of imbalances on the balance of payments
- Changes in economic activity at home and abroad alter the trade in goods
and services.
- The exchange rate influences the value of goods and services. Remember, the value of exports and imports is more important than the number of exports and imports - the value helps to reflect a more accurate picture of the flow of goods and services. A depreciation of the exchange rate will cause the price of exports to fall and the price of imports to rise. An appreciation of the exchange rate will cause the price of exports to rise and the price of imports to fall.
- Economic shocks and the rate of economic growth influence the demand
for, and supply of, goods and services.
- Inflation affects the price competitiveness of domestically produced goods, which influences international demand for exports and domestic demand for (cheaper) imports.
- International competitiveness is determined by factor input costs — rising labour costs can erode the competitiveness of domestically produced goods on the international market.
- The causes of an imbalance will depend on the structure of the economy and the significance of international trade and the international components of the aggregate demand function.
181
Consequences of imbalances on the balance of payments
- Unemployment could rise in exporting industries. If comparative advantage is lost in a particular industry or sector of the economy, this can lead to structural unemployment. If labour is immobile, long term unemployment and the hysteresis effect could occur.
- Aggregate demand will fall as the international dimension of the aggregate demand function is diminished.
In the short run, it may be possible to finance the trade deficit by selling UK financial assets overseas or by borrowing from abroad.
However, there is a risk that the ownership of British assets may be lost. This depends on the following:
- How reliant the country is on international trade - how open is the economy? How integrated is the country into the international market?
- How flexible are domestic industries to be able to respond to an economic shock?
- The J-curve effect suggests that a reduction in the value of a country's currency will initially increase a current account deficit before it reduces it. In the short term, firms purchasing imports may not have the time to find alternative products and so demand may be price inelastic.
- Marshall-Lerner conditions state that a devaluation or depreciation in the
price das wall only improve a current account position if the combined
price elasticity of demand for exports and imports is greater than 1.
Demand for products can become more elastic over time as buyers can investigate alternative products and change contracts. This means that it is possible for export revenues to increase and import expenditure to fall
182
Correction of an imbalance on the balance payments: internal devaluation versus exchange rate devaluation
Balance of payments imbalances can be corrected by internal devaluation, such as expenditure-reducing policies or exchange rate devaluation. Exchange rate devaluation involves intervention in the foreign exchange market or reducing the rate of interest to create a currency depreciation.
Internal devaluation is an expenditure-reducing policy that aims to correct external imbalances by reducing the level of aggregate demand and consequently the price level and nominal wages. Typically, this is done by raising the level of taxation and reducing government expenditure or raising interest rates.
- There are large costs in terms of lower GDP and higher unemployment.
- Nominal wages may be 'sticky' and the output cost may be large in comparison to the benefits of restoring competitiveness. Nominal wages may be reduced in the public sector only with little impact on competitiveness of the tradable goods sector. Although nominal wages may fall, internal devaluation may not affect productivity growth, so the lack of competitiveness may re-emerge.
- Exchange rate devaluation may be better as it avoids these costs by restoring competitiveness through lower export prices and higher import prices (expenditure switching).
However, exchange rate devaluation may not be better than internal devaluation if:
- the PED of exports and imports is price inelastic
- there is a J-curve effect in the short run
- the Marshall-Lerner condition is not satisfiea
external imbalances are caused by a lack of non-price competition + it causes a reduction in FDI (profit on exports for multinational corporations is worth less in foreign currency)
- it has no impact on the root tore of external imbalances (low growth in productivity, high labour costs)
183
Causes of poverty and income inequality
- Unemployment rates - result in rising rates of relative poverty - Structural unemployment and long term unemployment (causing the hysteresis effect) will widen income inequality and could result in regional disparities if industries are concentrated in particular areas of a country.
- Proportion of population claiming benefits - A greater number indicates a loss in household incomes and increases the risk that there will be a rise in poverty levels
- Labour productivity rates skills and quality of the labour force - influence employability of people and the length of frictional unemployment. The more productive the labour force, or the more flexible the labour market, the more likely income inequality and poverty are to be reduced.
- Industrial structure - experiencing deindustrialisation results in a change in the pattern of economic activity. This can result in a negative regional multiplier and higher structural unemployment, leading to regional inequality.
- Occupational structure and occupational mobility - The less mobile labour is, the less likely people are to move from one job or industry to another.
- Living costs- the higher the living costs, the lower the purchasing power of household incomes. Those who are lower income earners will experience the regressive effects of rising living costs, which will further increase income inequality.
184
Consequences of poverty and inequality
- Poverty and income inequality can result in underutilised resources and therefore a lower trend rate of growth through people being caught in the poverty trap and therefore lacking the incentive to work harder or at all. The economy is missing out on their skills and labour therefore poverty results in allocative inefficiency because resources are not being used as efficiently as possible, Leading to market failure. There is also a lack of short run economic growth on the demand side of the economy as lower incomes will result in lower rates of household consumption and therefore, in according to the accelerator principle, there will be less incentive for private sector investment.
- There could be a reduction in social cohesion as those in relative poverty are unable to engage fully in society, have limited social mobility and may be less inclined to support government policies.
- in some circumstances, particularly where there is absolute poverty, government and firms have less resistance to exploitative polices. Resources could become overexploited, and corruption and resource conflict can occur, which limits economic growth and prosperity.
- The consequences of the poverty trap depend upon whether it is relative or absolute poverty, the extent of the poverty trap, the policies that are being used to reduce the number of people in poverty and the efficacy of these policies, and how well the government manages resources and intervenes to improve the economic welfare of its citizens.
- When the income gap becomes too great (as measured by the Gini coefficient) this can act as a disincentive to increase productivity rates and earnings.
- a lack of aspiration can reduce entrepreneurship and innovation. The desire to improve is diminished.
- The government will need to intervene to redistribute income if it has the objective of a more even distribution of income. This would happen through progressive taxation systems and providing support througn cash benefits (income support/child benefits) and benefits in kind. This use of government funding could have an opportunity cost and resultin government borrowing.
185
purpose of fiscal policy
- manage rates of economic growth
- achieve low and stable rates of inflation
- maintain a balanced budgetary position
- redistribute income
186
merits of using fiscal policy
- Fiscal policy can be targeted to a degree to different groups (eg. increases in means-testing for low-income households or reductions in corporation tax for small to medium-sized businesses), whereas monetary policy can be seen as a blunt instrument, affecting all sectors of the economy.
- An expansion of fiscal policy (i.e. an increase in government expenditure or reduction in taxation) adds directly (as an injection or reduction in enterenture withdrawals) to aggregate demand, whereas monetary policy needs to work through the monetary transmission mechanism before it has an impact on output.
187
Factors influencing the effect of fiscal policy measures
- Factors influencing the effect of fiscal policy measures - automatic or discretionary
- Unintended consequences of a fiscal stimulus - know exactly where on econ cycle of how bug output gap is - rely too much on private sector investment to plug gap in spending
- size of multiplier - government overshoots and creates inflationary pressure
- business and consumer confidence - recession will be low so may not respond to stimulus
- crowding out vs crowding in
- cost of borrowing interest of debt increases - money spent to service the debt could be used in a more productive way
- credibility of the government - respond as expected
188
effectiveness of monetary policy in achieving the government's macroeconomic objectives
- time lag - takes time work through the transmission mechanism and the resulting change in economic activity is uncertain. The longer the time lag the less effective.
- Lack of targeting
- business and consumer confidence - uncertain about future the less likely they are to respond to a monetary stimulus
- liquidity trap - interest rates fall so far they no longer stimulate activity because agents aren’t confident enough about medium to long term and are not willing to spend or invest.
- Monetary policy asymmetry - the impact of monetary policy may not be uniform because some industries are more sensitive to a change in the rate of interest than others.
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Advantages of supply-side policies
- greater productive potential
- no trade-off between econ growth of price stability
- higher labour productivity - reduces unit labour costs - increase international competitiveness - increase in AD through increased exports
- new comparative advantage can be generated through investment providing benefits to trade and employment opportunities (developing country - avoid development trap and declining term of trade)
- investment into infrastructure - increase mobility of labour
- may encourage savings creating loanable funds for development
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Disadvantages of supply side policies
- no point in raising productivity, work incentives or efficiencies in markets if their is a lack of AD so supply-side policies might be limited in effectiveness without effective demand
- depends on the country some will be more effective in developing countries than others
- good governance is required in order to identify the more appropriate policies
- multiplier effects may be limited due to inadequate forward and backward linkages e.g. if FDI is encouraged rather than domestic investment
- Growth limited by shortages of skilled labour - may be offset by labour makers supply-side policies
- may not be possible if there is exhibiting constraints e.g. budget deficit, low tax base, tax evasion, low incomes and a low savings ratio
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Advantages of international trade for developed nations
- greater engagement creates greater opportunities to exploit comparative advantage
- economies of scale
- promotes competitions - domestic monopolies who face little competition this provides greater choice for consumers and greater pressure on firms to be economically efficient
- dynamic efficiency from innovation - stimulates product and process innovations which generate better products for consumers and enhance standard of living
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Disadvantages of international trade for developed nations
- specialisation could leave economy too dependent on a few industries and experiencing unsustainable, unbalanced growth
- greater competition from overseas and force domestic firms to reduce prices and experience a loss of producer surplus
- FDI could risk the loss of domestic assets and affect the flow of money into the financial account
- greater reliance on migrant workers could become vulnerable to external shocks which causes workers to return home
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Advantages of international trade for emerging countries
- gained from reduced trade barriers using exports to lager global market to fuel rapid rates of econ growth and development
- economies of scale enjoyed through vast volume of trade have been significant - enabling firms to undercut more expensive and less cost-efficient domestic producers
- creation of trade has enabled growth to accelerate and household incomes to rise improving HDI
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Disadvantages of international trade on emerging nations
- Rapid growth rates leads to rising inflation as supply side is unable to keep pace with demand side
- growth can become unbalanced ad over-reliance in export growth could leave country exposed to slowdown in world trade
- income inequalities - gains from trade are not distributed evenly
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Advantages of international trade for developing nations
- FDI plugs savings gap of countries with low savings ratio and provides knowledge and technology transfers resulting in job creation and reduced unemployment levels
- household incomes will rise and poverty falls - material wellbeing may rise are able to purchase basic necessities as well as more consumer goods
- tax receipts will rise enabling greater investment into infrastructure, sanitation, healthcare and education
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Disadvantages of international trade for developing nations
- reliance on primary sector makes county more vulnerable for economic shocks - volatile global commodity markets - affects terms of trade and export revenues unreliable
- reliance on tourism can result in environmental degradation making development unsustainable
- if growth is driven by resource extraction the depletion of natural resources may lead to unsustainable development
- profits may be repatriated by MNCs which will reduce the associates benefits to GDP if FDI has played significant part in the engagement in trade
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Causes of exchange rate fluctuations
- changes in demand and supply of a currency on the foreign exchange market
- changes in exports and supply of a currency are related to changes in the value of M an X and long-term capital flows
- determinants change slowly over time - rate of inflation, labour productivity, econ growth rates, interest rates and international competitiveness
- speculation
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Consequences of exchange rate changes (depreciation)
cause export prices to fall, increasing demand and the injection of funds into the circular flow of income:
- This will increase economic output, shown by an increase in aggregate demand and the AD curve shifting outwards.
- There may be a rise in job creation in exporting industries, reducing unemployment.
- However, a depreciation will increase import prices. Eventually this could reduce demand for imports, but in the short term, firms and consumers may be locked into contracts or domestic producers may have price inelastic supply, making them incapable of increasing output to provide substitutes for more expensive imports.
- This will cause the value of withdrawals from the circular flow of income to rise and a current account deficit to worsen (as shown by the J-curve effect).
- Overall, according to the Marshall-Lerner condition, a depreciation of the exchange rate will only improve the current account if the combined elasticities of exports and imports are greater than 1.
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Advantages of floating exchange rate
- monetary policy autonomy - absence of targets allows interest rates to be set to meet objectives
- correction of current account deficit
-currency speculation could reduce - lack of target means less rick as speculators have little to gain and this will encourage greater stability in the exchange rate over time
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Disadvantages of floating exchange rate
- Volatility - are unpredictable therefore firms may use future markets to fix exchange rate value
- regular changes - price instability erodes competitiveness of exports and costs or imported resources harder to manage
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Advantages of fixed exchange rate
- trade and investment- reduced currency risk through greater stability can promote trade and capital investment. Overseas investors will be more confident that sudden fluctuations in clays will not erode returns from investment
- discipline on domestic producers - a stable currency acts as a discipline on producers to remain productively efficient, reducing unit costs of production and keeping process down - encourage grater productivity and focus attention on research and innovation because producers can not rely on the automatic adjustment mechanism of a floating exchange rate
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Disadvantages of fixed exchange rate
- high opportunity costs - high levels of foreign currency are required in order to facilitate intervention on foreign exchange market to buy currency in order to raise demand if currency falls below fixed rate
- speculative attack - overvalue currency may be sold so increasing its supply to drive down its price
- retaliation - Courtney may stimulate AD by deliberately undervaluing its currency raising net exports other countries may devalue their own rates creating currency war
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Evaluation of comparative advantage - advantages
- increased trade might reflect changing comparative advantage
- economies industrialised and transition towards becoming more developed they are able to diversify their source of comparative advantage and their trade relationship with developed economies
- higher percentage of trade between regions suggests regions a have different factor endowments and will specialise in their source of comparative advantage trading together for mutual benefits
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Evaluation of comparative advantages - disadvantages
- trade between developed countries remains significant but developed countries are likely to have similar relative opportunity costs and factor endowments
- does not are economies of scale into account
- mobility of resources are not considered
- intra-regional trade may reflect transport costs
- difficult to measure and based on assumptions
- changing patterns may be due to absolute advantage abuse by economic development
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Advantages of protectionism
- protection of employment can slow down deindustrialization and protect certain regions from structural unemployment
- reduction in competition from foreign firms will allow infant industries to grow and aim EOS to compete
- domestic firms will be more willing to invest
- fiscal dividends - tariff or expenditure tax
- correction of imbalance of payments by limiting exports
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Disadvantages of protectionism
- deadweight loss - higher prices, CS is reduced and lower income earners priced out of market ( increasing inequality)
- distort price signals and allocation of scarce resources
- cost-push inflationary pressure could arise due to higher costs or imported components - decreased competitiveness
- deter FDI and other long-term capital flows
- seen as a form or government failure which isn’t seen as a sustainable way
- does not provide stimulus to domestic firms, via exposure to international competition to drive efficiency
- lack of incentive to be either statically or dynamically efficient
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Benefits of joining the world trade organisation
- attract FDI - more MNCs setting up in country may increase employment opportunities + average income levels - bring new training methods and tech to boost supply side
- contribute to country’s exports. The move towards free trade may enable the country’s producers to take greater advantage of comparative advantage - increased output + average households income as injection into circular flow + lower prices and increase purchasing power
- discourages dumping - in the long run can stop domestic firms being driven out of business by unfair competition + losing jobs
- increases in trade + economic growth can raise income per head and tax revenue. These increases can in turn, result in more spending and more resources being devoted to healthcare and education raising life expectancy and more choices
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Risks of joining the world trade organisation
- cutting tariffs may prevent infant industries may not grow and build sufficient EOS to be able to compete - don’t have a chance to exploit potential comparative advantage
- illegal to ban products because of the way it is produced - less pressure to stop child and slave labour
- growth in exports + FDI results in a more rapid exploitation of non-renewable resources, future economic growth and development may be jeopardised
- freer trade may result in a reallocation of resources with some industries expanding and contracting - such changes may result in structural unemployment, regional disparities and increased inequality
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Role of central bank
- issuing notes and coins - controlling n umber in circulation to make sure demands are met without leading to inflation
- managing monetary policy
- lender of last resort - if there is a liquidity shortage in financial system bank can loan funds in last resort. The bank is able ti promote financial stability
- providing banking facilities - handles tax revenues and gov borrowing + expenditure - commercial banks + financial institutes hold deposits in central bank as reserve balances and cash deposits and are required to maintain an agreed amount of overnight resources
- regulating financial system in order to ensure confidence and trust in financial institutes by household and firms
- managing foreign firms - fixed or semi-fixed exchange rate central bank can intervene by buying or selling foreign reserves to maintain target
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Evaluation of labour force survey
- Measure can be used to make international comparisons
- surveying households and extrapolating data from a sample
- not truly representative
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\evaluation of claimant count
- conducted cheaply and easily as government already has record of number of people claiming JSA
- Excludes unemployed that are unable or unwilling to claim JSA
- not all countries have benefit system so can't wake international comparisons
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Consequences of unemployment
- Lower gross domestic product- represents significant wastage of economic resources the loss of output could have effect knock-on effect of firms willingness ability to invest
- lower standards of living - household incomes fall consumers are not able to purchase products which would boost material living standards
- greater income inequality - structural unemployment can result in greater disparity
- pressure on gov finances - under pressure one to greater payments of benefits and lower tax revenue
- hysteresis effect- the deterioration of someone's skills through long period of unemployment making them less productive und increase probability of long term unemployment
- higher rates of unemployment -more serious costs are likely to be
- long term unemployment - lower rate for longer time would might be more damaging than high rate for very short term
- Wages - one benefit from higher rate of unemployment - reduced wage rate and wage rate inflationary pressure
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Effects of full employment
- Operating efficiently
- not experiencing negative consequences of high unemployment
- operating at full capacity runs risk of experiences demand-puII inflationary pressure when rise In AD
- workers in employment but not using skills to full extent - lower skilled job than qualifications
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Evaluation of the role of the financial sector in promoting economic development
- way of channeling financial resources to where they are needed - whatever source of capital I.e. FDI , remittances or micro-finance there needs to be a financial sector that can be trusted for firms and households to be able to access firms
- developing countries can lack the social and physical infrastructure necessary to access financial sector
- rural communities may not be able to access a bank because they do not have infrastructure or communication links prohibiting entrepreneurs or firms developing and investing limiting the ability of the economy to diversify
- use of mobile phones has given many in developing countries access to financial markets and reducing asymmetric information and rural communities can access microfinance and remittances which raises household incomes and economic welfare
- financial sector on its own is not sufficient to promote econ development. Government also needs to provide finds for supply-side policies on social infrastructure to raise labour productivity so that factors of production can be mobilised
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The extent to which globalisation benefits developing economies depends on
- the structure of the economy - least developed economies are unlikely to find globalisation is largely beneficial, as the structure of their economies is more likely to be dominated by primary sector production
- the source of comparative advantage - developing economies that have advantage in secondary sector are more likely to benefit from globalisation
- investment into factors of production - developing economies are more likely to benefit from globalisation if there is investment in human capital in order to ensure that more people are able to benefit from economic growth and that income inequalities do not rise
- governance and management of the benefits - developing economies that manage globalisation well are more likely to experiences benefits - seen in China who has transitioned towards development
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Advantages of globalisation for developed countries
- greater engagement in trade will increase export revenues and increase credits to the current account - injection will have multiplier effects that create employment opportunities and raise household incomes - the consumption of merit goods should rise like education and healthcare which will boost productivity rates and international competitiveness
- FDI largely comes from developed nations. Greater engagement in trade will increase corporate profits and promote more investment in green technologies reducing market failure
- Labour mobility and access to skilled labour from overseas increases productivity rates and the productive capacity of the economy
- Fiscal dividends - the government will receive higher taxation receipts through higher income and corporation tax revenues. This will facilitate greater gov spending on merit goods, help pay off national debt and investment into supply-side policies
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Disadvantages of globalisation on developed countries
- reliance on trade with emerging economies could increase vulnerability to external shocks which may expose structural weakness
- investment into green technologies depends upon objectives of firms. If firms are allowed to be purely profit driven they will have less incentive
- there is loss of ownership of assets as foreign firms purchase domestic firms and resources which could erode domestic sovereignty over how resources are used
- the outsourcing of industries consistent with the efficient-seeking motive of MNCs can erode the manufacturing base of a developed economy which results in deindustrialisation - resulting in structural unemployment and if not addressed long term unemployment and deepening regional disparities
- the stronger the economy is structurally the greater the flexibility of the labour market the more likely it is benefit from globalisation
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Advantages of globalisation on emerging countries
- as global market have broadened, the opportunities for emerging economies have also widened. The potential for them to exploit their source of comparative advantage is much greater. Through engagement in international trade and investment by MNCs, emerging economies can transition to become more developed as they gain knowledge and technology transfer
- experience economic growth but at a very rapid rate. This high rate of growth will create job opportunities and reduce unemployment, increasing economic wellbeing and raiding HDI
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Disadvantages of globalisation in emerging countries
- rapid rates of economic growth experienced by emerging countries need to be sustainable. This requires sufficient investment into the supply side of the economy to avoid supply chain bottlenecks or fuelling inflationary pressure
- can experience quite volatile rates of economic growth if there is a lack of proper governance which can deter investment or result in capital flight
- turkey - had to increase interest rates to defend their currency
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Evaluation of the impact of emerging countries on other economies
- as emerging economies may find that as they transition towards development they have greater power and representation in inter-governmental negotiations- G20 (China and Brazil) which signifies their rising importance on the global stage
- emerging economies will have greater influence over developed nations as globalisation becomes deeper and economies become interdependent through exploitation of comparative advantage - the UK textile industry has been off-shored to economies with lower costs bases
- the flow of capital has started to reverse as more FDI comes from emerging economies to developed countries. This shifts the balance if power away from developed counties and trading blocs.
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Economic integration vs free trade
- Economic integration affects the pattern of international trade but may not raise economic efficiency - trade is distorted by terrific barriers making it allocatively inefficient
- therefore economic efficiency is only promoted through fill and free international trade rather than within trade blocs because countries can fully specialise and exploit competitive advantage
- especially rue when trade blocs are made up if countries its similar economic structures because there is not a distinct difference in their comparative advantage to make intra-regional trade mutually beneficial - these countries would not ready naturally and is only diverted because of existence of trading bloc
- by trading more freely and internationally, engaging in more inter-regional trade countries are able to more easily access diverse products promoting econ development
- however trading blocs can help insulate a country from external shocks and provide fiscal support
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The role of savings and investment in promoting economic development
- less developed countries lack the necessary savings or do not have savings in a liquid form necessary to provide Finland for productive investment. Governments can also make it worse by holding down interest rates in the hope of stimulating firms to borrow but this reduces the APS and therefore reduces loanable funds for private sector investment
- investment is only productive if countries have access to physical capital with which boost the productive capacity of the country
- developing countries can be particularly vulnerable to capital flight as MNCs seek lower cost bases resulting in long-term investment that would increase their supply capacity
- limited capability of producing capital goods, many emerging and developing countries will import the necessary capital stock which may be limited by the lack of foreign exchange to pay for it
- less developed countries rely on primary sector and are subject to declining terms of trade relating in less export revenue being received to provide necessary foreign exchange to fund purchase of imported goods such as medical supplies and foodstuffs
- investment also needs to take place in supply-side policies to boost human capital and raise productivity rates as well as innovation and entrepreneurship
