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Economics Y2 > Macro L14 > Flashcards

Macro L14 Flashcards

1
Q

Primary product:

A
  • Products that do not undergo a manufacturing process
  • Natural resource
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2
Q

What economies tend to be dependent on primary product?

A

LEDCs

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3
Q

LEDCs:

A

Less economically developed countries

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4
Q

MEDCs:

A

More economically developed countries

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5
Q

Are manufactured goods income elastic or inelastic and why?

A
  • Income elastic –> when income rises, demand also rises
  • Manufactured goods have components that require skills to make hence they have higher value
  • As a result, we are more likely to purchase these products when income rises to improve our standard of living
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6
Q

Chain of analysis for why LEDCs experience lower economic growth:

A
  • LEDCs are usually dependent on primary products, which are price volatile
  • As a result, revenues, incomes and value of exports are volatile and fluctuate
  • Volatile revenue means greater uncertainty for investment, hence this will decrease
  • Fall in exports leads to lower economic growth, fall in living standards
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7
Q

Currency depreciation:

A

Value of currency falls due to free market

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8
Q

Currency devaluation:

A

Value of currency falls due to gov intervention

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9
Q

Common market:

A

Trade agreement where members agree to remove trade barriers

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10
Q

Customs union:

A

Countries come together to form a trade agreement usually involving import duties on other countries and free trade between those involved

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11
Q

Floating exchange rate system:

A

Exchange rate dependent on supply and demand that fluctuates constantly

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12
Q

Fixed exchange rate system:

A

Nominal exchange rate set by monetary authority

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13
Q

Commodity:

A

Physical substance interchangeable with another product of same type that investors buy or sell

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14
Q

How do protectionist measures used by MEDCs negatively impact LEDCs?

A
  • LEDCs struggle to compete as intervention distorts the market
  • Harder to pursue export-led growth
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15
Q

Savings ratio:

A

Proportion of income that is saved

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16
Q

2 reasons why LEDCs have low saving ratios:

A

1) Most people in LEDCs have low income hence they have high marginal propensity to consume on necessities (less remains for saving)
2) Financial system will be weaker than MEDCs, making savings harder

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17
Q

What does the Harrod-Domar model suggest?

A

Economic growth is dependent on savings ratio

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18
Q

Stages of Harrod-Domar model:

A

1) Savings ratio
2) Investment
3) Capital stock
4) Output
5) Income

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19
Q

Solutions for low saving ratios:

A

1) Borrowing from abroad
2) Reforming financial sector
3) Microfinance
4) Aid (mostly from IMF)

20
Q

Microfinancing:

A

Banking service provided to low-income grps who otherwise would have no other access to financial services

21
Q

Why are foreign currencies important for economic development of LEDCs?

A

Needed to import:
1) Capital goods to industrialise
2) Raw materials unavailable domestically

22
Q

Why might some LEDCs face shortage of foreign currency?

A

Do not export enough to earn sufficient foreign currency to finance imports

23
Q

Foreign currency gap:

A

Country’s expenditure in foreign currency like imports exceeds its foreign currency earnings like from exports

24
Q

FDI:

A

Foreign direct investment is flow of capital from one country to another in order to gain a lasting interest in an enterprise in the foreign country.

25
Q

Causes of foreign currency gap:

A

1) Low export earnings
2) High oil prices
3) Underperforming agricultural sector
4) Large foreign debt

26
Q

Solutions for foreign currency gap:

A

1) Debt relief –> wiping off debt
2) Aid –> not paid back
3) Development of private sector –> using primary products to produce other products
4) Development of tourism

27
Q

Capital flight:

A

When a large amount of financial assets leave a country due to an event that leads to investor losing confidence

28
Q

Hot money flows:

A

Short-term, high-speed capital flows that move in and out of countries in response to changing economic and financial conditions

29
Q

How does capital flight impact economic growth?

A
  • Capital flight leads to fall in inward FDI and increase in outward FDI, leading to depreciation in exchange rate
  • As a result, currency speculators sell domestic currency to profity from exchange rate movement, which worsens foreign currency gap
  • Inflation rises due to depreciation in exchange rate
  • Inward FDI becomes less attractive as it is riskier
30
Q

Demography:

A

Composition of a human pop

31
Q

Dependency ratio calculation:

A

Number of dependents in pop/Number of working age pop

32
Q

How does the size of the working and non-working population affect economic growth?

A

1) Larger size of working pop, greater the productive capacity of economy
2) Larger size of non-working pop, greater burden on working pop as they must be supported by state

33
Q

How do ageing pops in MEDCs limit economic growth?

A
  • Causes dependency ratio to rise
  • Larger amounts of gov spending to support elderly
  • Less available for supply side policies
  • Lower levels of economic growth
34
Q

How do high birth rates limit economic growth?

A

Leads to a youthful pop w/ larger workforces, which means there’s a greater potential for economic growth

35
Q

Principal:

A

Value of original loan

36
Q

Interest:

A

Determined by interest rate on loan

37
Q

Debt service ratio:

A

Debt service payments (principal + interest)/export earnings

38
Q

What does it mean service a debt?

A

Repay both the principal and the interest

39
Q

How do high debt service ratios hinder economic growth?

A
  • Leads to high debt burden
  • Large amount of gov spending used to service debt
  • Less available to spend in other areas such as education
  • Infrastructure and labour force is weaker than usual
  • Leads to weaker economic growth
40
Q

How does a lack of access to credit and banking hinder development?

A
  1. For firms, borrowing from brands is an important means of financing their business operations
  2. For individuals, access to banking services allows for security and encourages saving
41
Q

What role does a country’s infrastructure play in economic growth?

A

Quality of country’s infrastructure plays role in determining efficiency and quality firms produce at, which limits economic growth

42
Q

Why do education systems in LEDCs hinder economic growth?

A

1) Access to education is limited. Quality of education is also relatively low
2) Quality of workforce is relatively low
3) Productivity is thereby limited
4) Economic growth is limited as labour is a factor of production that is especially important in LEDCs

43
Q

How does an absence of property rights hinder economic development?

A

1) Landowners cannot use their land as collateral. Hence, they struggle to obtain loans to finance investment that could increase production.
2) Entrepreneurs cannot use their property as collateral. Hence, the struggle to obtain loans to finance investment and expansion. Reduces likelihood of talented entrepreneurs creating successful businesses, hence limiting innovation and competition

44
Q

Collateral:

A

An item that a borrower pledges to the lender as security for the loan

45
Q

How does corruption hinder economic growth?

A
  • If corruption rises, gov officials are more likely to pursue own interests rather than that of the public
  • Decreases likelihood that infrastructure projects will be completed efficiently
  • Infrastructure remains inadequate, limiting economic development
46
Q

How does war limit economic growth?

A
  • Deterioration in country’s infrastructure due to damage
  • Quantity and quality of workforce reduced due to death
47
Q

Corruption:

A

Absence of entrusted power for financial gain

Economics Y2 (8 decks)

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