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Economics > Macro > Flashcards

Macro Flashcards

1
Q

income

A

look at what is learnt

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2
Q

income measures

A

the flow of money a person or economy receives each year.

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3
Q

assets

A

things you own

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4
Q

wealth

A

the sum or stock of all your assets added up

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5
Q

over time income can

A

turn into wealth, by buying assets

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6
Q

step 1 in circular flow of income

A

Firms buy factors of production, like labour and land, from households. And in return, they pay households factor incomes, like wages and rent.

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7
Q

step 2 in circular flow of income

A

Households spend the factor incomes on goods and services produced by firms

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8
Q

income must =

A

expenditure = output

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9
Q

Explain why national income equals national expenditure which equals national output.

A

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.

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10
Q

National output is equal to national incomes. So, if national output is rising then

A

national incomes must also be rising.

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11
Q

real GDP is

A

a statistic that measures national output, it measures all the stuff really being produced in an economy

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12
Q

examples of leakages/withdrawals from the circular flow

A

savings SIT
taxation
imports

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13
Q

examples of injections to the circular flow

A

gov spending GIX
exports
investment

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14
Q

leakages > injections

A

economy will shrink because money is leaving the circular flow - real GDP decreased

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15
Q

injections > leakages

A

economy will grow, because money is entering the circular flow - real GDP increase

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16
Q

leakages = injections

A

real GDP stays the same

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17
Q

aggregate demand

A

demand for all goods in an economy added up

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18
Q

components of AD

A

C + I + G + (X-M)

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19
Q

on average percentages of each

A

C - 60%
I - 14%
G - 25%
X-M - 1%

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20
Q

gross investment

A

Gross refers to the total amount (in this case, the total amount of the original investment).

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21
Q

net investment

A

the value of investment after depreciation

Net refers to the total minus any deductions (in this case, the amount of depreciation).

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22
Q

equation for net investment

A

Net Investment = Gross Investment - Depreciation

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23
Q

When the price level increases,

A

real GDP decreases.

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24
Q

when price level goes down it causes an

A

extension in AD, increase in real GDP

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25
Q

When the price level increases

A

there is a contraction in AD, real GDP decreases

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26
Q

what happens to consumption if disposable income falls?

A

Consumption is likely to decrease as disposable incomes have fallen and so people have less money to spend.

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27
Q

what will happen to the government if incomes decrease?

A

receive less money in income tax, value added tax and corporation tax

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28
Q

if C,I,G decrease then

A

AD will decrease, shift inwards to the left

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29
Q

incomes decrease then

A

AD shifts left

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30
Q

incomes increase then

A

consumption increase so AD shifts right

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31
Q

if C,I,G increase then

A

AD will increase, shift outwards to the right

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32
Q

AD decreases

A

left shift

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33
Q

AD increases

A

right shift

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34
Q

disposable income

A

the amount left over after paying your taxes

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35
Q

multiplier effect

A

is where an initial increase in injections leads to a larger increase in aggregate demand.

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36
Q

multiplier ratio

A

total change in real GDP ÷ initial injection

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37
Q

What is the UK’s multiplier ratio, as estimated by the Bank of England in 2016?

A

1.375

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38
Q

Downward Multiplier effect

A

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

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39
Q

downward multiplier effect will mean that

A

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

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40
Q

Benefits

A

a payment to unemployed or low income workers and they are shown as an increase in consumption

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41
Q

an increase in benefits will mean that

A

the government has less money available to spend on other projects

g to shift inwards

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42
Q

impacts on AD of an increase in benefits

A

investment - increase
consumption - increase
gov spending - decrease

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43
Q

intrest rates

A

The return on your savings

extra money you will get from saving

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44
Q

when you are borrowing money an interest rate is

A

The percentage of your borrowing which you pay to the bank

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45
Q

increase in interest rates will mean that

A

saving will increase

borrowing decrease

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46
Q

intrest rates increase, what effect will be had on consumers

A

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

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47
Q

increase in investment will have what effect on AD

A

AD will fall, shift left

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48
Q

intrest rates decrease, what effect will be had on consumers

A

increase in disposable income as they have to pay less return on their borrowing which means they will spend more

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49
Q

intrest rates decrease, what effect will be had on firms

A

cost of borrowing decreases so encouraged from investing

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50
Q

decrease in interest rates affect aggregate demand

A

Investment increases, Consumption increases, Aggregate Demand increases

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51
Q

what did brexit do to consumer confidence

A

reduced, people left less confidence about the UK future

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52
Q

consumer confidence = low

A

shift to the left

as ppl save more and spend less

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53
Q

consumer confidence = high

A

shift to the right

as ppl spend more and save less

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54
Q

what does increased confidence do to investment

A

increased investment - shidt outwards

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55
Q

what does decreased confidence do to investment

A

decrease - AD SHIFT inwards

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56
Q

the animal spirits are high investor confidence is

A

high meaning investment increases and therefore AD shifts right

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57
Q

what is the likely effect of an increased in house prices

A

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

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58
Q

what is the likely effect of a decrease in house prices

A

Wealth Decreases, Negative Wealth Effect, Consumption Decreases, Aggregate Demand Decreases

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59
Q

what is the wealth effect in america

A

6% - house prices increase spending also increases

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60
Q

the wealth effect in europe is

A

amprox. 0%

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61
Q

An increase in the state pension will cause saving to ___. This will ___ consumption and ___ aggregate demand.

A

decrease, increase, increase

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62
Q

savings ratio is

A

what % of disposable income consumers will save

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63
Q

saving ratio formula is

A

savings / disposable income x100

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64
Q

working out savings using the savings ratio formula

A

saving ratio x disposable income

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65
Q

high savings ratio

A

consumers save more
reducing consumption
AD shifts inwards

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66
Q

low savings ratio

A

consumers save less
increasing consumption
AD shifts outwards

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67
Q

national wellbeing

A

measures how satisfied people are in their lives. it is a measure which incorporates things like income, health, environment and education

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68
Q

GDP

A

is the value of all the goods and services produced in a country over a specified period of time

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69
Q

economic growth

A

is simply the increase in the number of goods and services produced in an economy

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70
Q

PPP

A

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

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71
Q

what do we measure using GDP

A

national output

all the stuff really being produced

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72
Q

what is nominal GDP measured using

A

prices

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73
Q

what is real GDP measured using

A

adding up the quantity

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74
Q

Economic growth can be defined as

A

an increase in real GDP

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75
Q

what does evidence suggest about the relationship between income and happiness?

A

positive

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76
Q

what is real GDP

A

adjusted for inflation

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77
Q

what is total GDP

A

total number of goods and services produced in an economy in a given time period

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78
Q

what is GDP per capita

A

GDP per person

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79
Q

value of GDP

A

monetary worth

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80
Q

volume of GDP

A

quantity of goods and services produced

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81
Q

what are limitations of GDP when comparing living standards

A

benefits fo EG may accuse only for a small proportion of the population
high GDP does not necessarily mean people are happier

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82
Q

measures of national income

A

GDP
GNP
GNI

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83
Q

what is GNP

A

value of goods and services produced by the citizens of a country both domestically and abroad

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84
Q

what is GNI

A

incomes of citizens of a country earned domestically and abroad

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85
Q

what is the Easterlin paradox

A

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.

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86
Q

inflation

A

increases prices

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87
Q

deflation

A

fall in prices

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88
Q

disinflation

A

falling rate of increase

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89
Q

causes of inflation

A

demand pull
most push
growth in money supply

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90
Q

demand pull inflation is

A

demand pulls prices with it

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91
Q

cost push inflation is

A

high costs of production push prices up

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92
Q

growth in money supply

A

increases demand for goods

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93
Q

measures of inflation

A

CPI

RPI

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94
Q

CPI

A

uses prices of a ‘basket’ of everyday goods that are compared over time

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95
Q

RPI

A

includes housing costs and uses arithmetic mean, which is why it gives a higher estimate of inflation

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96
Q

effects of inflation

A

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

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97
Q

limitations fo CPI

A

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 §

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98
Q

inflation target is

A

2% however following Brexit vote it has surged to 2.52%

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99
Q

bofP

A

is a record of all the transactions between one economy and its trading partners

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100
Q

components of BodP

A

current account

capital and financial acccount

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101
Q

current account =

A

trade in goods and services + income transfers + current transfers

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102
Q

income transfers =

A

inflow and outflow of remittances to home countries

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103
Q

current transfers =

A

inflow and outflow of loans or grants

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104
Q

current account surplus

A

inflow > outflows

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105
Q

current account deficit

A

inflow < outflows

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106
Q

unemployment

A

is when someone is out of work and is looking for work

people that are not looking for work are not classed as unemployed

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107
Q

underemployment

A

is when a worker is not working to his/her potential also includes people working part time

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108
Q

causes unemployment

A 
structural 
frictional 
seasonal 
cyclical 
real-wage inflexibility
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109
Q

structural

A

when workers do not have the right skills employers want

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110
Q

frictional

A

when workers are moving between jobs

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111
Q

seasonal

A

when demand for a good or service is low at certain times of the year eg.tourism

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112
Q

cyclical

A

when workers lose jobs due to slowdown in growth eg.in a recession

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113
Q

real-wage inflexibility

A

when supply of labour does not adjust to a fall in demand for labour. wages tend to remain high, causing unemployment

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114
Q

effects of unemployment

A

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

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115
Q

measures of unemployment

A

claimant count

uk labour force survey

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116
Q

claimant count

A

tells us how many people claimed jobseeker allowance in a given period of time

117
Q

ILO measure is

A

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

118
Q

AD refers to

A

the total demand for all the goods and services produced in an economy

119
Q

AD=

A

C + I + G + (X-M)

120
Q

if intrest rates are high

A

C will fall

121
Q

consumer conference

A

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

122
Q

wealth effects

A

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

123
Q

disposable income

A

is income that is left after all taxes have been deducted. this determines the level of consumption.

124
Q

marginal propensity to consume

A

establishes how much extra is consumed following a rise in disposable income. this tends to be higher for low-income families

125
Q

AD curve is slowing downwards because

A

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

126
Q

fiscal policy

A

is about making changes to government spending or taxation

a government can adopt either a contractionary or expansionary fiscal policy

127
Q

contractionary fiscal policy is

A

about increased taxation an lower spending

128
Q

expansionary policy is

A

about lowering taxation and increasing spending

129
Q

goevrnemnet seeping forms about .

A

25% of AD

130
Q

government spending depends on

A

the trade cycle

131
Q

when the economy is doing poorly,

A

unemployment rises. so the gov has to spend more on welfare while the tax revenue declines - opposite happens during an economic boom

132
Q

investment is

A

spendi g by firms on technolog, infrastucture

133
Q

investment forms about

A

15% of AD

134
Q

gross domestic investment

A

refers to the total investment made in a period of time

135
Q

net investment

A

gross investment - depreciation of assets

136
Q

influences in investment

A
  • 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
137
Q

real incomes

A

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

138
Q

non-price factors

A

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

139
Q

X+M form about

A

2% of AD

140
Q

in a recession

A

inflation lowers so exports may increase and imports decrease

141
Q

in a global recession

A

total volumes of exports and trade will fall

142
Q

national boom

A

exports decrease and imports increase

143
Q

global boom

A

total volumes of imports and trade will rise

144
Q

exchange rate increase

A

exports fall and imports rise as UK exports appear MORE EXPENSIVE

145
Q

depreciation

A

imports fall and exports rise as UK exports appear cheaper

146
Q

Classical LRAS

A

assumption is that firms operate at full capacity

147
Q

Keynesian LRAS

A

assumption that the economy can have output gaps due to market imperfections

148
Q

short run AS

A

refers to AS where capital is fixed and only labour is variable

149
Q

long run AS

A

refers to AS where all factor inputs are variable

150
Q

factors affecting long-run AS

A
  • 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
151
Q

factors affecting short-run AS

A
  • 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
152
Q

an outward shift in AS

A

extends AD
real output increases
price level falls

153
Q

outward shift in AD

A

shift in AD expands AS
real output increases
price level rises

154
Q

Injections

A

G
I
X

155
Q

Withdrawals

A

T
S
M

156
Q

withdrawals …

A

decrease AD and growth

157
Q

actual economic growth is

A

real growth measured using GDP figures

158
Q

potential economic growth is

A

the overall capacity for growth in the economy. This may be higher than actual economic growth.

159
Q

causes of growth;

demand side factors

A

increases in the components of AD will increase growth (C,I,G, X-M)

160
Q

causes of growth;

supply side factors

A

technological advancement
education and skills
demographic changes/ migration
government regulation

161
Q

actual growth rate is

A

recorded for a particular time period

162
Q

trend rate of growth is

A

the average rate of growth over time

163
Q

impacts of growth;

benefits

A 
more jobs 
better living standards 
reduced poverty 
more public goods 
improved government finances
164
Q

impacts of growth;

costs

A

environmental damage
high inlfation
wider gap between the rich and poor

165
Q

output gap

A

is the difference between the actual and the potential real GDP

166
Q

negative output gap is where

A

actual real GDP < potential real GDP

spare capacity and high unemployment

167
Q

Keynesians believe that a negative output gap can occur in

A

short and long run

168
Q

positive output gap iw where

A

actual real GDP > potential real GDP

over capacity and high inflation

169
Q

classical economists believe that negative and positive output gaps only occur in

A

the short run

170
Q

in a boom

economic growth is 
unemployment is 
inflation is 
consumers/business confidence is 
government finances are 
change rates. are
A 
high 
low
high
high
high tax revenue, low welfare spending 
strong currency (high imports, lower exports)
171
Q

in a recession

economic growth is 
unemployment is 
inflation is 
consumers/business confidence is 
government finances are 
change rates. are
A 
low 
high 
low 
low 
low tax revenue, high welfare spending 
weak currency (lower imports, high exports)
172
Q

a rise in MPC

A

increases the multiplier

173
Q

a rise in MPS

A

reduces the multiplier

174
Q

a rise in MPT

A

reduces the multiplier

175
Q

a rise in MPM

A

reduces the multiplier

176
Q

the multiplier effect would shift the AD

A

to the right every time there is an injection into the economy

177
Q

role of the bank of England

A

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

178
Q

there are 2 types of demand side-policies

A

fiscal policy

monetary policy

179
Q

monetary policy refers to the use of

A

intrest rates and money supply by the central bank to influence the economy

180
Q

fiscal policy refers to the use of

A

taxes and government spending by the state to influence the economy

181
Q

high interest rates -

A

increase savings and decrease spending and investment - reduce AD/AS and growth and rise versa

182
Q

high money supply -

A

increases borrowing and investment - increases AD/AS and growth and rise versa

183
Q

demand side policies;

strengths

A

shorter time lags

184
Q

demand side policies;

weaknesses

A

can cause inflation

slow and inaccurate data collection may lead to incorrect decisions

185
Q

budget deficit occurs

A

when government spending > tax revenues

186
Q

budget surplus occurs

A

when government spending < tax revenues

187
Q

macro economic objectives

A 
high economy growth 
low unemployment 
low and stable inflation 
greater income equality 
environment sustainability 
balanced government budget 
balanced current account on BofP
188
Q

supply side policies

A

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)

189
Q

supply side policy;

strengths

A

can reduce inflation
create more jobs
lead to international competitiveness

190
Q

supply side policy;

weaknesses

A

longer time lags
large opportunity cost
slow and inaccurate data collection may lead to incorrect decisions

191
Q

types of supply side policies

A

market based - little gov action

interventionist policies - gov takes action in a more direct manner

192
Q

high economic growth will

  • low inflation
  • current account balance
  • environmental sustainability
  • low unemployment
  • balanced budget
  • income inequality
A
  • not keep inflation low
  • no environmental sustainability
  • low unemployment
  • no income inequality
193
Q

policy conflicts;

fiscal policy

A
  • 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
194
Q

policy conflicts;

monetary policy

A
  • 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
195
Q

policy conflicts;

supply-side policies

A

more spending today may mean less spending tomorrow

infrastructure projects can harm the environment

196
Q

supply side policies will shift the LRAS curve

A

inwards

197
Q

expansionary fiscal/monetary policy will shift the AD curve

A

to the right

198
Q

impacts of globalisation;

positive

A

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

199
Q

impacts of globalisation;

negative

A

increased environmental degradation/ pollution
increased interdependence - recession in one country spreads quickly
access to chap labour abroad - local unemployment will rise

200
Q

increased globalisation has meant that over the last 50 years

A

better means of communication and transport
world trade organisation (WTO) - reduction in trade. barriers
creation on TNCs

201
Q

characteristics of globalisation

A

increased trade
increased interdependence
more foreign direct investment (FDI) and transnational companies (TNCs)
easy access to factor inputs

202
Q

the world trade organisation

A

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

203
Q

regional trade agreements/monetary unions;

advantages

A

no transaction costs
greater price transparency
no need to account for ER fluctuations which hurt countries’ competitiveness
attract FDI - good for growth

204
Q

regional trade agreements/monetary unions;

disadvanatages

A

transition costs eg. menu costs

no control over monetary policy

205
Q

types of trading blocs;

free trade area

A
  • free movement of goods and services

- each member can set their own trade barriers for non-members

206
Q

types of trading blocs;

customs union

A

member countries have a joint trade policy for all non-members

207
Q

types of trading blocs;

common market

A

free movement of factor inputs

208
Q

types of trading blocs;

monetary union

A

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

209
Q

specialisation is about

A

a country producing goods in which it has a comparative advantage

210
Q

assumptions/limitations of the theory of comparative advantage

A 
all countries produce identical goods 
free movement of factor inputs 
0 transportation costs 
0 economies of scale 
perfect information
211
Q

trade and specialisation;

advantages

A 
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
212
Q

trade and specialisation;

disadvantages

A

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’

213
Q

types of trade barriers

A

tariffs - tax on imports
quotas - limit on number of imports
subsidies - grants to local producers
non-tariff barriers - eg. health and safety requirements

214
Q

impacts of trade barriers;

advantages

A

revenue for gov form tarrifs
local firm make higher profits
local jobs are protected

215
Q

impacts of trade barriers;

disadvantages

A

less choice for consumers
higher prices for consumers
lower living standards
inequality

216
Q

terms of trade calculates

A

the amount of imports that a country exports can buy

217
Q

tot =

A

(index of export prices ÷ index of import prices) x 100

218
Q

impacts of terms of trade;

advantages

A

greater choice for consumers

better living standards

219
Q

impacts of terms of trade;

disadvantages

A

loss of international competitiveness
leads to a current account deficit
as demand for exports decreases, unemployment in the export industry increases

220
Q

factors that affect ToT

A

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

221
Q

trade diversion

A

divert trade from old to new partners

222
Q

trade creation

A

create ne strade

223
Q

factors that influence

A

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

224
Q

reducing current account imbalances

A

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

225
Q

causes of current account deficit

A
  • 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
226
Q

causes of current account surplus

A

protectionist measures decrease imports

  • low inflation - cheap exports
  • low domestic growth - increased demand for exports
  • relatively high labour productivity - low average cost - cheap exports
227
Q

international competitiveness;

beneifts

A

Cretes jobs in the export industry
export-led growth
improves tarde déifiait

228
Q

international competitiveness;

costs

A

over-reliance on exports can become a problem if the world economy experiences recession - massive job losses

229
Q

factors affecting international competitiveness

A

relative unit costs
relative level of regulation
relative inflation
relative non-wage costs

230
Q

measures of international competitiveness

A

relative unit labour cots

relative export prices

231
Q

3 types of exchange rates

A

floating
managed
fixed

232
Q

exchange rates is

A

the value of one currency in terms of another

233
Q

value decreases =

A

depreciation

234
Q

value increases =

A

appreciation

235
Q

what determines the value of the currency - floating

A

forces of demand and supply

236
Q

factors influencing the ER

A

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

237
Q

what determines the value of the currency - managed

A

indirect gov intervention eg.buying/selling currency

238
Q

managing the ER

A

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

239
Q

effects of devaluation/ depreciation

A

makes exports more competitive - current account surplus

however if all countries devalue their currencies then nobody gains from it

240
Q

A depreciation of the exchange rate makes imports more …………. and exports …………

A

i. expensive

ii. cheaper

241
Q

Import expenditure is a
and export revenue is an
This means that
This will improve

A

leakage from the circular flow
injection
less money will be leaving the economy and more money will be entering it.
the current account.

242
Q

import demand is

A

inelastic in the short run - contracts

elastic in the long run

243
Q

exchange rate increases, price of imports will

A

increase

244
Q

If the price of imports increases but the quantity demanded remains the same, what will happen

A

the current account will worsen

245
Q

a depreciation will

A

Decrease imports

246
Q

a appreciation will

A

Increase imports and decrease exports

247
Q

explain the j-curve

A

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.

248
Q

what happens at the point where the current account improves

A

when the current account deficit starts to improve we say that the Marshall-Lerner condition has been satisfied

249
Q

what is the Marshall Lerner condition

A

PED for exports + PED for imports > 1

250
Q

if there is a decrease in import expenditure what will happen the current account

A

improve

251
Q

if ER depreciates what happens to employment and growth

A

demand for exports rises, job creation, more consumer spending = more growth

252
Q

if ER depreciates what happens to inflation

A

imports appear more expensive, and if a country is reliant to imports then - inflation

253
Q

if ER depreciates what happens to FDI flows

A

domestic goods appear cheaper - more FDI flows

254
Q

causes of inequality

A 
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
255
Q

capitalism allows

A

individuals to pursue their own goals

256
Q

to profit maximise firms

A

employ highly skilled labour - who demand high wages

whereas low skilled workers earn much less - creates inequality

257
Q

absolute poverty

A

refers to a situation where a person is denied basic needs over a long period of time (eg. food shelter and clothes)

258
Q

causes of changes in poverty

A

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

259
Q

relative poverty occurs when

A

a person can meet basic needs but earns considerably less. than the country’s average person

260
Q

wealth inequality

A

refers to the extent of the difference in the value of assets that people in a country own

261
Q

income inequality

A

is the extent of the difference in the amount people in a country earn

262
Q

wealth. is a

A

stock concept = asset

263
Q

income is a

A

flow concept = liquid money

264
Q

the gini coefficient

A

is a number between 0 and 1, which shows the level of inequality. the further the value is from 0 the greater the inequality

265
Q

gini coefficient =

A

area A ÷ (areas A+B)

266
Q

privatisation

A

this is about selling state-owned firms to private sector because the latter is more efficient

267
Q

efficiency translates into

A

lower prices fro consumers and higher profits for firms

this leads to increased consumer spending and investment which results in higher growth

268
Q

Microfinance schemes

A

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

269
Q

floating exchange rates are where

A

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

270
Q

removal of subsides

A

subsidies lead to inefficiency
removing subsidies increases competitiveness -increases productive/ allocative efficiency
competitiveness means lower prices

271
Q

foreign direct investment

A

creates jobs - more consumer spending - higher AD - growth
countries can benefit from expertise of other nations
foreign firms may spend on local infrastructure

272
Q

trade liberalisation

A

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

273
Q

foreign currency gap

A

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

274
Q

harrow-Doar model

A

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

275
Q

volatility of commodity prices

A

inelastic demand and supply price instability - overall economic instability (high inflation, unemployment)

276
Q

primary product dependency

A

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

277
Q

HDI

A

human development index is a composite measure of development

278
Q

education index

A

average and expected years of schooling

279
Q

life expectancy index

A

life expectancy at birth

280
Q

income index

A

GNI per person

281
Q

benefits fo HDI

A

multidimensional

uses 2 measures for education

282
Q

drawbacks of HDI

A

ignores inequality as t uses averages

missing factors eg.happiness

283
Q

how do we measure inequality

A

Lorenz curve and mini coefficient

284
Q

head count ratio

A

counts the number pf poor people

285
Q

mutlidimensional poverty

A

looks at income and things like crime, sanitation, water etc.

286
Q

factors influencing growth and development

economic factors

A
  • 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
287
Q

factors influencing growth and development

non-economic factors

A

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

288
Q

Customs union

A

Have some tariffs on non member countries

289
Q

Common market

A

Free movement of factors of production

Economics (5 decks)

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