Macro chains Flashcards
Assess the drawbacks of more MNCs in your economy
It can cause the Tragedy of the Commons as more economic agents use up the same limited resources. Pollution can increase affecting living standards, and this increased demand for resources and labour from MNCs can push up resource costs, lessening domestic firms’ international and internal competitiveness. As smaller domestic firms may not be able to compete with the larger economies of scale of smaller domestic firms, they might lose business or be forced to shut down. Additionally, regional multiplier effects might be limited due to the MNCs repatriating their profits back home and also, they might choose to bring their own specialist workers instead of train local workers. Via transfer pricing by MNC’s, domestic economies might lose out too much tax revenue from the MNC. Zambia has been a victim of this but the hew global 15% minimum tax rate should help this which over 150 countries have signed.
Explain the costs of a current account deficit
A current account deficit means imports are greater than exports. From this perspective, in regards to trade, leakages are greater than injections and will negatively impact net injections and national income. A persistent trade deficits means more money is leaving the economy’s circular flow than coming in and means a country will be losing out to export multiplier effects and associated accelerator effects. This might limit short run growth and improvements in living standards. Additionally, a persistent current account might suggest issues with productivity, and lack of international competitiveness which need attention, such as poor quality labour and labour shortages. It’s developing economies which require export led growth the most to help them develop.
Evaluate ‘explain the costs of a current account deficit’
It depends on the cause of the current account deficit. One reason might be rising income and higher demand more imports, or a temporary increase in the exchange rate, which automatic adjustments of a floating exchange rate will deal with.
Explain the cons of deflation
As firms see some inflation as an incentive to produce, deflation can be seen as a disincentive. Consumers delay their purchases when deflation is experienced, waiting for prices to fall further. This shifts AD to the right and with prices falling further, consumers continue to delay their purchases and thus the deflationary spiral occurs with negative multiplier and accelerator effects. Once deflation is in an economy, it is hard to tackle as Japan experienced. It can negatively affect growth and reduce demand for labour, increasing unemployment and the burden on the government for welfare payments at a time when income tax revenue is also falling. This negatively affects government finances and its ability to use expansionary fiscal policy. This can all negatively affect consumer confidence. Investment and animal spirits will also be negatively affected via the fall in firms’ profits as they suffer continual falling demand. These conditions of low confidence, make expansionary monetary policy and its transmissions mechanism very hard to work. This is because even if when central banks lower interest rates significantly, consumers and firms don’t respond. It’s in this environment that quantitative easing may be utilised, with varying results.
