Macro Flashcards
income
look at what is learnt
income measures
the flow of money a person or economy receives each year.
assets
things you own
wealth
the sum or stock of all your assets added up
over time income can
turn into wealth, by buying assets
step 1 in circular flow of income
Firms buy factors of production, like labour and land, from households. And in return, they pay households factor incomes, like wages and rent.
step 2 in circular flow of income
Households spend the factor incomes on goods and services produced by firms
income must =
expenditure = output
Explain why national income equals national expenditure which equals national output.
The total spending (national expenditure) from households across the economy must come from the total income (national income) they earn. Households spend (national expenditure) on the total output (national output) of goods and services produced by firms in the economy.
National output is equal to national incomes. So, if national output is rising then
national incomes must also be rising.
real GDP is
a statistic that measures national output, it measures all the stuff really being produced in an economy
examples of leakages/withdrawals from the circular flow
savings SIT
taxation
imports
examples of injections to the circular flow
gov spending GIX
exports
investment
leakages > injections
economy will shrink because money is leaving the circular flow - real GDP decreased
injections > leakages
economy will grow, because money is entering the circular flow - real GDP increase
leakages = injections
real GDP stays the same
aggregate demand
demand for all goods in an economy added up
components of AD
C + I + G + (X-M)
on average percentages of each
C - 60%
I - 14%
G - 25%
X-M - 1%
gross investment
Gross refers to the total amount (in this case, the total amount of the original investment).
net investment
the value of investment after depreciation
Net refers to the total minus any deductions (in this case, the amount of depreciation).
equation for net investment
Net Investment = Gross Investment - Depreciation
When the price level increases,
real GDP decreases.
when price level goes down it causes an
extension in AD, increase in real GDP
When the price level increases
there is a contraction in AD, real GDP decreases
what happens to consumption if disposable income falls?
Consumption is likely to decrease as disposable incomes have fallen and so people have less money to spend.
what will happen to the government if incomes decrease?
receive less money in income tax, value added tax and corporation tax
if C,I,G decrease then
AD will decrease, shift inwards to the left
incomes decrease then
AD shifts left
incomes increase then
consumption increase so AD shifts right
if C,I,G increase then
AD will increase, shift outwards to the right
AD decreases
left shift
AD increases
right shift
disposable income
the amount left over after paying your taxes
multiplier effect
is where an initial increase in injections leads to a larger increase in aggregate demand.
multiplier ratio
total change in real GDP ÷ initial injection
What is the UK’s multiplier ratio, as estimated by the Bank of England in 2016?
1.375
Downward Multiplier effect
An initial increase in withdrawals leads to a larger decrease in aggregate demand.
as the multiplier occurs and the injections are multiplied the withdrawals will also be multiplier shrinking the economy - shifting AD inwards
downward multiplier effect will mean that
firms make fewer sales
they will have to downsize and lay off workers
government revenue will decrease as firms cut back on workers as there is less taxation through income and spending. Income will decrease reducing spending further, reducing consumption and shifting AD further to the left
Benefits
a payment to unemployed or low income workers and they are shown as an increase in consumption
an increase in benefits will mean that
the government has less money available to spend on other projects
g to shift inwards
impacts on AD of an increase in benefits
investment - increase
consumption - increase
gov spending - decrease
intrest rates
The return on your savings
extra money you will get from saving
when you are borrowing money an interest rate is
The percentage of your borrowing which you pay to the bank
increase in interest rates will mean that
saving will increase
borrowing decrease
intrest rates increase, what effect will be had on consumers
save more - spend less consumption decreases
borrow less
and have less disposable income due to having today a higher rate on their borrowed money decreasing AD
increase in investment will have what effect on AD
AD will fall, shift left
intrest rates decrease, what effect will be had on consumers
increase in disposable income as they have to pay less return on their borrowing which means they will spend more
intrest rates decrease, what effect will be had on firms
cost of borrowing decreases so encouraged from investing
decrease in interest rates affect aggregate demand
Investment increases, Consumption increases, Aggregate Demand increases
what did brexit do to consumer confidence
reduced, people left less confidence about the UK future
consumer confidence = low
shift to the left
as ppl save more and spend less
consumer confidence = high
shift to the right
as ppl spend more and save less
what does increased confidence do to investment
increased investment - shidt outwards
what does decreased confidence do to investment
decrease - AD SHIFT inwards
the animal spirits are high investor confidence is
high meaning investment increases and therefore AD shifts right
what is the likely effect of an increased in house prices
wealth of household will increase
= called positive wealth effect
ppl will consume more as they feel wealthier = increase in consumption will increase AD shifting AD right
what is the likely effect of a decrease in house prices
Wealth Decreases, Negative Wealth Effect, Consumption Decreases, Aggregate Demand Decreases
what is the wealth effect in america
6% - house prices increase spending also increases
the wealth effect in europe is
amprox. 0%
An increase in the state pension will cause saving to ___. This will ___ consumption and ___ aggregate demand.
decrease, increase, increase
savings ratio is
what % of disposable income consumers will save
saving ratio formula is
savings / disposable income x100
working out savings using the savings ratio formula
saving ratio x disposable income
high savings ratio
consumers save more
reducing consumption
AD shifts inwards
low savings ratio
consumers save less
increasing consumption
AD shifts outwards
national wellbeing
measures how satisfied people are in their lives. it is a measure which incorporates things like income, health, environment and education
GDP
is the value of all the goods and services produced in a country over a specified period of time
economic growth
is simply the increase in the number of goods and services produced in an economy
PPP
purchasing power parity is used to compare the living standards between countries
£10 can buy you more in India than it can in the UK
what do we measure using GDP
national output
all the stuff really being produced
what is nominal GDP measured using
prices
what is real GDP measured using
adding up the quantity
Economic growth can be defined as
an increase in real GDP
what does evidence suggest about the relationship between income and happiness?
positive
what is real GDP
adjusted for inflation
what is total GDP
total number of goods and services produced in an economy in a given time period
what is GDP per capita
GDP per person
value of GDP
monetary worth
volume of GDP
quantity of goods and services produced
what are limitations of GDP when comparing living standards
benefits fo EG may accuse only for a small proportion of the population
high GDP does not necessarily mean people are happier
measures of national income
GDP
GNP
GNI
what is GNP
value of goods and services produced by the citizens of a country both domestically and abroad
what is GNI
incomes of citizens of a country earned domestically and abroad
what is the Easterlin paradox
As income increases, happiness increases up to a point as people are able to afford important items like food and a home. However, the marginal happiness from each extra unit of income falls as people spend money on things they don’t need and which bring less happiness.
inflation
increases prices
deflation
fall in prices
disinflation
falling rate of increase
causes of inflation
demand pull
most push
growth in money supply
demand pull inflation is
demand pulls prices with it
cost push inflation is
high costs of production push prices up
growth in money supply
increases demand for goods
measures of inflation
CPI
RPI
CPI
uses prices of a ‘basket’ of everyday goods that are compared over time
RPI
includes housing costs and uses arithmetic mean, which is why it gives a higher estimate of inflation
effects of inflation
creates uncertainty, consumers may be unwilling to spend - AD falls
loss of interventional competitiveness - exports fall
savings are now worthless
people on fixed incomes will see PPP decline
menu costs - firms need to update prices
shoe leather costs - consumers will have to spend more time and energy trying to find cheaper products
limitations fo CPI
prices could change due to changes in quality
temporary shocks can exaggerate inflation figures
a typical ‘basket’ of goods could be different for different groups of consumers
price rise for certain goods may induce a prise in demand for its substitutes, which is not entirely captured by CPI §
inflation target is
2% however following Brexit vote it has surged to 2.52%
bofP
is a record of all the transactions between one economy and its trading partners
components of BodP
current account
capital and financial acccount
current account =
trade in goods and services + income transfers + current transfers
income transfers =
inflow and outflow of remittances to home countries
current transfers =
inflow and outflow of loans or grants
current account surplus
inflow > outflows
current account deficit
inflow < outflows
unemployment
is when someone is out of work and is looking for work
people that are not looking for work are not classed as unemployed
underemployment
is when a worker is not working to his/her potential also includes people working part time
causes unemployment
structural frictional seasonal cyclical real-wage inflexibility
structural
when workers do not have the right skills employers want
frictional
when workers are moving between jobs
seasonal
when demand for a good or service is low at certain times of the year eg.tourism
cyclical
when workers lose jobs due to slowdown in growth eg.in a recession
real-wage inflexibility
when supply of labour does not adjust to a fall in demand for labour. wages tend to remain high, causing unemployment
effects of unemployment
high rates of unemployment reduce AD - low growth
adversely affects people’s psychological wellbeing
government loses in tax revenues and need s to spend more on welfare
measures of unemployment
claimant count
uk labour force survey
claimant count
tells us how many people claimed jobseeker allowance in a given period of time
ILO measure is
based on a survey of nearly 40,000 households and measures unemployment based on certain criteria - eg.people need to be unemployed for at least a month
AD refers to
the total demand for all the goods and services produced in an economy
AD=
C + I + G + (X-M)
if intrest rates are high
C will fall
consumer conference
also determines the level of consumption. if the economy is doing well and confidence levels are high about future, consumers are likely to increase consumption and rise versa
wealth effects
if price of a persons assets (eg.house) goes up the person is more likely to increase spending this is related to the consumer confidence idea
disposable income
is income that is left after all taxes have been deducted. this determines the level of consumption.
marginal propensity to consume
establishes how much extra is consumed following a rise in disposable income. this tends to be higher for low-income families
AD curve is slowing downwards because
real balance effect - as prices rise, fewer people are able to buy goods and services
international competitiveness - if domestic prices are higher, exports appear more expensive, while imports appear less expensive, so net exports fall, reducing AD
interest rate - higher interest rates reduce investments and consumption therefore reducing AD
fiscal policy
is about making changes to government spending or taxation
a government can adopt either a contractionary or expansionary fiscal policy
contractionary fiscal policy is
about increased taxation an lower spending
expansionary policy is
about lowering taxation and increasing spending
goevrnemnet seeping forms about .
25% of AD
government spending depends on
the trade cycle
when the economy is doing poorly,
unemployment rises. so the gov has to spend more on welfare while the tax revenue declines - opposite happens during an economic boom
investment is
spendi g by firms on technolog, infrastucture
investment forms about
15% of AD
gross domestic investment
refers to the total investment made in a period of time
net investment
gross investment - depreciation of assets
influences in investment
- as the economy grows more jobs are created an incomes rise. so meet the increased demand, firms increase investment
- business confidence - how owners feel about the prospects of investing, bases on economic conditions
- high demand for exports requires more investment to meet high demands
- if interest rates are high, investment will bye low because the cost of borrowing would be high
- if credit is easily assessable, investment will be high
- tight government regulation is likely to limit investment , eg. high taxes
real incomes
as real incomes rise, demand for imports rises
this decreases net trade (X-M). in other words it increases a country’s current account deficit
non-price factors
the exchange rate does not affect the quality of traded goods, and changed to exports/imports as a result of exchange rates changes could be mitigated if domestic goods are particularly high quality or unique
X+M form about
2% of AD
in a recession
inflation lowers so exports may increase and imports decrease
in a global recession
total volumes of exports and trade will fall
national boom
exports decrease and imports increase
global boom
total volumes of imports and trade will rise
exchange rate increase
exports fall and imports rise as UK exports appear MORE EXPENSIVE
depreciation
imports fall and exports rise as UK exports appear cheaper
Classical LRAS
assumption is that firms operate at full capacity
Keynesian LRAS
assumption that the economy can have output gaps due to market imperfections
short run AS
refers to AS where capital is fixed and only labour is variable
long run AS
refers to AS where all factor inputs are variable
factors affecting long-run AS
- technical improvements
- changes in relative productivity
- improvements in education and skills
- changes in government regulation
- demographic changes - immigration increase long-run AS
- changes in competition policy - more competition increases long-run AS
factors affecting short-run AS
- changes in raw material costs - eg. if cost of oil rises, short-run AS will decrease
- changes in exchange rate - eg. if the exchange rate rises, imports become cheaper
- changes in changes in tax rates - eg. if tax rates are reduced, short-run AS will increase
an outward shift in AS
extends AD
real output increases
price level falls
outward shift in AD
shift in AD expands AS
real output increases
price level rises
Injections
G
I
X
Withdrawals
T
S
M
withdrawals …
decrease AD and growth
actual economic growth is
real growth measured using GDP figures
potential economic growth is
the overall capacity for growth in the economy. This may be higher than actual economic growth.
causes of growth;
demand side factors
increases in the components of AD will increase growth (C,I,G, X-M)
causes of growth;
supply side factors
technological advancement
education and skills
demographic changes/ migration
government regulation
actual growth rate is
recorded for a particular time period
trend rate of growth is
the average rate of growth over time
impacts of growth;
benefits
more jobs better living standards reduced poverty more public goods improved government finances
impacts of growth;
costs
environmental damage
high inlfation
wider gap between the rich and poor
output gap
is the difference between the actual and the potential real GDP
negative output gap is where
actual real GDP < potential real GDP
spare capacity and high unemployment
Keynesians believe that a negative output gap can occur in
short and long run
positive output gap iw where
actual real GDP > potential real GDP
over capacity and high inflation
classical economists believe that negative and positive output gaps only occur in
the short run
in a boom
economic growth is unemployment is inflation is consumers/business confidence is government finances are change rates. are
high low high high high tax revenue, low welfare spending strong currency (high imports, lower exports)
in a recession
economic growth is unemployment is inflation is consumers/business confidence is government finances are change rates. are
low high low low low tax revenue, high welfare spending weak currency (lower imports, high exports)
a rise in MPC
increases the multiplier
a rise in MPS
reduces the multiplier
a rise in MPT
reduces the multiplier
a rise in MPM
reduces the multiplier
the multiplier effect would shift the AD
to the right every time there is an injection into the economy
role of the bank of England
maintains financial stability of the economy, its aim is to maintain a target inflation rate of 2%. The Monetary Policy committee (MPC) discusses the long-term growth prospects, the effects of government policy, debt levels in the economy
there are 2 types of demand side-policies
fiscal policy
monetary policy
monetary policy refers to the use of
intrest rates and money supply by the central bank to influence the economy
fiscal policy refers to the use of
taxes and government spending by the state to influence the economy
high interest rates -
increase savings and decrease spending and investment - reduce AD/AS and growth and rise versa
high money supply -
increases borrowing and investment - increases AD/AS and growth and rise versa
demand side policies;
strengths
shorter time lags
demand side policies;
weaknesses
can cause inflation
slow and inaccurate data collection may lead to incorrect decisions
budget deficit occurs
when government spending > tax revenues
budget surplus occurs
when government spending < tax revenues
macro economic objectives
high economy growth low unemployment low and stable inflation greater income equality environment sustainability balanced government budget balanced current account on BofP
supply side policies
improve infrastructure (investment in transport links)
research and technology (R+D)
increase incentives (raising min wage)
increasing competition (preventing monopolies)
reforming labour market (min wages abolishment)
human capital (training)
supply side policy;
strengths
can reduce inflation
create more jobs
lead to international competitiveness
supply side policy;
weaknesses
longer time lags
large opportunity cost
slow and inaccurate data collection may lead to incorrect decisions
types of supply side policies
market based - little gov action
interventionist policies - gov takes action in a more direct manner
high economic growth will
- low inflation
- current account balance
- environmental sustainability
- low unemployment
- balanced budget
- income inequality
- not keep inflation low
- no environmental sustainability
- low unemployment
- no income inequality
policy conflicts;
fiscal policy
- increasing spending today to increase AD might mean that tomorrow taxes will have to be increased
reducing spending may reduce budget deficit but it may lower living standards
policy conflicts;
monetary policy
- cutting interest rates may control inflation but it also erodes the value of savings
- increasing interest rates can reduce AS, as borrowing becomes expensive (lower investment). this could lead to cost push inflation
policy conflicts;
supply-side policies
more spending today may mean less spending tomorrow
infrastructure projects can harm the environment
supply side policies will shift the LRAS curve
inwards
expansionary fiscal/monetary policy will shift the AD curve
to the right
impacts of globalisation;
positive
increase in consumer choice
low prices for consumers
improved standard of living
access to cheap factor inputs for businesses
firms an make higher profits due to a bigger market
encourages specialisation - increased efficiency
reduction in unemployment
increased revenue form import tariffs for governments
impacts of globalisation;
negative
increased environmental degradation/ pollution
increased interdependence - recession in one country spreads quickly
access to chap labour abroad - local unemployment will rise
increased globalisation has meant that over the last 50 years
better means of communication and transport
world trade organisation (WTO) - reduction in trade. barriers
creation on TNCs
characteristics of globalisation
increased trade
increased interdependence
more foreign direct investment (FDI) and transnational companies (TNCs)
easy access to factor inputs
the world trade organisation
promotes freee trade by following a policy pf trade liberalisation. it provides platform for trade negotiations ana d settlement of any trade issues between member countries
regional trade agreements/monetary unions;
advantages
no transaction costs
greater price transparency
no need to account for ER fluctuations which hurt countries’ competitiveness
attract FDI - good for growth
regional trade agreements/monetary unions;
disadvanatages
transition costs eg. menu costs
no control over monetary policy
types of trading blocs;
free trade area
- free movement of goods and services
- each member can set their own trade barriers for non-members
types of trading blocs;
customs union
member countries have a joint trade policy for all non-members
types of trading blocs;
common market
free movement of factor inputs
types of trading blocs;
monetary union
single currency - as in the Eurozone
conditions necessary for success include:
similar growth patterns and business cycles of member countries
similar cultures to decrease barriers to free movement
increase spending in adversely affected areas
specialisation is about
a country producing goods in which it has a comparative advantage
assumptions/limitations of the theory of comparative advantage
all countries produce identical goods free movement of factor inputs 0 transportation costs 0 economies of scale perfect information
trade and specialisation;
advantages
greater choice for consumers cheaper goods for consumers greater efficiency firms experience economies of scale wider market - high profits increased growth and higher living standards
trade and specialisation;
disadvantages
countries become interdependent
terms of trade may worsen
over-reliance on the production of one good
countries lacking comparative advantage will lose out unwanted good can be ‘dumped in poorer countries at very low prices, which is bad for local firms
may widen the rich and poor gap
bad for ‘infant industries’
types of trade barriers
tariffs - tax on imports
quotas - limit on number of imports
subsidies - grants to local producers
non-tariff barriers - eg. health and safety requirements
impacts of trade barriers;
advantages
revenue for gov form tarrifs
local firm make higher profits
local jobs are protected
impacts of trade barriers;
disadvantages
less choice for consumers
higher prices for consumers
lower living standards
inequality
terms of trade calculates
the amount of imports that a country exports can buy
tot =
(index of export prices ÷ index of import prices) x 100
impacts of terms of trade;
advantages
greater choice for consumers
better living standards
impacts of terms of trade;
disadvantages
loss of international competitiveness
leads to a current account deficit
as demand for exports decreases, unemployment in the export industry increases
factors that affect ToT
relative inflation rates - higher inflation - exports costly - ToT improves
relative productivity rates - greater productivity - comparative advantage - ToT improves
exchange rate - higher Er - exports costly - ToT improves
trade diversion
divert trade from old to new partners
trade creation
create ne strade
factors that influence
poorer countries tend to export low value goods
no. of emerging economies
growth of trading blocs and bilateral trade agreements
changes in relative exchange rates
reducing current account imbalances
expenditure reducing policies - things that reduce AD eg.increasing income tax
expendititure switching policies - policies that affect demand for imports
supply side policies - policies that affect demand for exports - eg. increasing spending on education
doing nothing
causes of current account deficit
- high inflation rate - cheap imports
- relatively low labp=our productivity - increased average cost - cheap imports
- higher exchange rate - cheap imports
- high domestic growth - increased demand for imports
- growth in large economies - increased demand for imports
causes of current account surplus
protectionist measures decrease imports
- low inflation - cheap exports
- low domestic growth - increased demand for exports
- relatively high labour productivity - low average cost - cheap exports
international competitiveness;
beneifts
Cretes jobs in the export industry
export-led growth
improves tarde déifiait
international competitiveness;
costs
over-reliance on exports can become a problem if the world economy experiences recession - massive job losses
factors affecting international competitiveness
relative unit costs
relative level of regulation
relative inflation
relative non-wage costs
measures of international competitiveness
relative unit labour cots
relative export prices
3 types of exchange rates
floating
managed
fixed
exchange rates is
the value of one currency in terms of another
value decreases =
depreciation
value increases =
appreciation
what determines the value of the currency - floating
forces of demand and supply
factors influencing the ER
relative intreats rates - high = ppl save = demand for £ ^ = appreciation
relative inflation rate - higher = export more expensive = demand for UK exports falls - £ depreciates
speculation - ppl speculate value will fall - demand for £ decreases - depreciates
state of the economy - economy improving - investors feel confident - demand for £ rises - £ appreciates
what determines the value of the currency - managed
indirect gov intervention eg.buying/selling currency
managing the ER
foreign currency transactions - to increase currency value, central bank will buy domestic currency - reduces supply of £ and increases demand - £ appreciates
interest rates - to increase the currency value, central and will raise the interest rate, this increases demand of £ - £ appreciates
effects of devaluation/ depreciation
makes exports more competitive - current account surplus
however if all countries devalue their currencies then nobody gains from it
A depreciation of the exchange rate makes imports more …………. and exports …………
i. expensive
ii. cheaper
Import expenditure is a
and export revenue is an
This means that
This will improve
leakage from the circular flow
injection
less money will be leaving the economy and more money will be entering it.
the current account.
import demand is
inelastic in the short run - contracts
elastic in the long run
exchange rate increases, price of imports will
increase
If the price of imports increases but the quantity demanded remains the same, what will happen
the current account will worsen
a depreciation will
Decrease imports
a appreciation will
Increase imports and decrease exports
explain the j-curve
short run, demand for imports is inelastic meaning a depreciation will increase import expenditure and worsen the Current Account.
long run, demand becomes more elastic over time (like when companies finish their contracts), the demand for imports decreases leading to a decrease in import expenditure. This will then improve the Current Account.
what happens at the point where the current account improves
when the current account deficit starts to improve we say that the Marshall-Lerner condition has been satisfied
what is the Marshall Lerner condition
PED for exports + PED for imports > 1
if there is a decrease in import expenditure what will happen the current account
improve
if ER depreciates what happens to employment and growth
demand for exports rises, job creation, more consumer spending = more growth
if ER depreciates what happens to inflation
imports appear more expensive, and if a country is reliant to imports then - inflation
if ER depreciates what happens to FDI flows
domestic goods appear cheaper - more FDI flows
causes of inequality
regressive tax system - more equality weak trade unions - more quality unfair pensions scheme - more equality lack of social security - more equality level of education employment/inheritance laws
capitalism allows
individuals to pursue their own goals
to profit maximise firms
employ highly skilled labour - who demand high wages
whereas low skilled workers earn much less - creates inequality
absolute poverty
refers to a situation where a person is denied basic needs over a long period of time (eg. food shelter and clothes)
causes of changes in poverty
high growth - decreases absolute poverty due to the creation of jobs
high growth - increases average income - possible increase in relative poverty
more FDI - more jobs - decreases AP
more trade - more jobs - decreases AP
increased income tax - reduced relative poverty
relative poverty occurs when
a person can meet basic needs but earns considerably less. than the country’s average person
wealth inequality
refers to the extent of the difference in the value of assets that people in a country own
income inequality
is the extent of the difference in the amount people in a country earn
wealth. is a
stock concept = asset
income is a
flow concept = liquid money
the gini coefficient
is a number between 0 and 1, which shows the level of inequality. the further the value is from 0 the greater the inequality
gini coefficient =
area A ÷ (areas A+B)
privatisation
this is about selling state-owned firms to private sector because the latter is more efficient
efficiency translates into
lower prices fro consumers and higher profits for firms
this leads to increased consumer spending and investment which results in higher growth
Microfinance schemes
about providing small loans to poor people whoa re unlikely to get loans from big banks
loans are given to groups so that repayment is guaranteed this helps poor people escape poverty
floating exchange rates are where
demand that demand and supply decide the value of the currency which means the currency is likely to depreciate
-imports become expensive while exports become cheap - local industries will flourish leading to higher growth
removal of subsides
subsidies lead to inefficiency
removing subsidies increases competitiveness -increases productive/ allocative efficiency
competitiveness means lower prices
foreign direct investment
creates jobs - more consumer spending - higher AD - growth
countries can benefit from expertise of other nations
foreign firms may spend on local infrastructure
trade liberalisation
this is about reducing trade barriers
free trade promotes growth by creating jobs
free trade leads to greater allocative efficiency
but this could rescue growth if a country is flooded with cheap imports
foreign currency gap
developing countries tend to face a shortage of foreign currency this is mainly due to
low export earnings
increase in global prices
using foreign currency on debt repayment
harrow-Doar model
midel posits that savings level and the capital - output ratio are the main determinants fo growth
developing countries have low levels of savings - lack of investment in capital - ow growth
volatility of commodity prices
inelastic demand and supply price instability - overall economic instability (high inflation, unemployment)
primary product dependency
primary goods = commodities (generally low - valued)
countries dependent on primary products tend to remain poor
demand is income inelastic, which means rising incomes do not increase demand to the same extent
such countries export low -valued goods while importing high value goods, leading to falling terms of trade
HDI
human development index is a composite measure of development
education index
average and expected years of schooling
life expectancy index
life expectancy at birth
income index
GNI per person
benefits fo HDI
multidimensional
uses 2 measures for education
drawbacks of HDI
ignores inequality as t uses averages
missing factors eg.happiness
how do we measure inequality
Lorenz curve and mini coefficient
head count ratio
counts the number pf poor people
mutlidimensional poverty
looks at income and things like crime, sanitation, water etc.
factors influencing growth and development
economic factors
- infrastructure - trading costly - discourages FDI
- education - lack educational infrastructure
- capital flight - ppl saving money in more secure foreign banks with high i/r - developing countries lack investment in capital = low frowth
- demographic factors - tend to have large populations- ^ - dependency ratio - low income per head
absence of property rights - property rights give sense of certainty - good for investment/ borrowing and growth however developing countries lack some property rights - debt - developing countries tend to be drowned in debt - gov takes loans and often is the future generation that has to -pay this money back - becomes worse off
access to credit - essential for doing business, counties that lack such facilities (eg.microfinance) limit growth a s ppl r unable to escape poverty
factors influencing growth and development
non-economic factors
wars: disrupt growth and development
children can’t attend schools
discourages FDI
brain drain
poor governance : this leads to an inefficient resource allocation as resources are used to produce goods/services that are popular
corruption: corruption leads to an inefficient resource allocation
Customs union
Have some tariffs on non member countries
Common market
Free movement of factors of production
