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A Level Economics > Macro Year 2 > Flashcards

Macro Year 2 Flashcards

(106 cards)

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1
Q

What is globalisation?

A

The process in which national economies become increasingly integrated and interdependent

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2
Q

What causes globalisation?

A

Trade liberalisation, growth of multi-national firms, growth of trade blocs, technological advancements, increased mobility of labour and capital

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3
Q

What are some benefits of globalisation?

A

Lower prices, greater employment, benefits like WTO and trade blocs, tech transfers and innovation, benefits of economies of scale, freer movement of labour

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4
Q

What are some drawbacks of globalisation?

A

Growing inequality (trickle down effect), higher structural unemployment, environmental costs, trade imbalances, greater risk of external shock

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5
Q

What is absolute advantage?

A

Using the same factors of production and producing more of a product

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6
Q

What is comparative advantage?

A

Producing a product with a small opportunity cost

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7
Q

What are the assumptions in the comparative advantage theory?

A

Perfect knowledge, constant production costs, no transport costs, no external production costs

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8
Q

What are benefits of specialisation and trade?

A

Lower prices and more choice for consumers, larger markets and economies of scale, higher economic growth, better living standards

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9
Q

What are drawbacks of specialisation and trade?

A

Increase of risk from external shocks, global monopolies get bigger, unbalanced development, deficit in trade, environmental damage, increased unemployment

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10
Q

What is bilateral trade?

A

2 countries agreeing to have equal amounts of trade with each other

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11
Q

What is the formula for terms of trade?

A

(index of export prices / index of import prices) x100

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12
Q

What factors influence a country’s terms of trade?

A

Relative inflation rates, relative production rates, changes in exchange rates

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13
Q

What can a change in the terms of trade impact in a country?

A

Living standards, competitiveness of goods and services, balance of payments, trade surplus and deficit, output, employment

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14
Q

What is a Free Trade Area?

A

Blocs of countries who agree to abolish trade restrictions between themselves

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15
Q

What is a Customs Union?

A

Internal free trade for member states who also apply protectionist measures for non-member states (NAFTA, ASEAN)

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16
Q

What is a Common Market?

A

Internal free trade and movement of factors of production for member states who also apply a set of protectionist measures for non-member states

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17
Q

What is a Monetary Union?

A

Internal free trade and movement of factors of production for member states who also adopt a single common currency and a set of protectionist measures for non members (EU)

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18
Q

What are benefits of a Monetary Union?

A

Elimination of transaction costs, price transparency, less exchange rate, increased attractiveness for FDI

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19
Q

What costs of Monetary Union?

A

Transition costs, loss of exchange rates flexibility, loss of ability to conduct independent monetary policy

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20
Q

What is the World Trade Organisation?

A

A body who promotes free trade between member countries via trade negotiations and is responsible for solving trade disputes among countries

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21
Q

Why would some countries restrict free trade?

A

Protect infant and sunset industries, protect employment, correct imbalances on the balance of payments

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22
Q

How can a country restrict free trade? Give examples

A

Quotas (physical limit on the quantity of imports), subsidies (grants to domestic producers), non-tariff barriers (health and safety, product specifications), tariffs (taxes on imported goods, customs duties)

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23
Q

What is the Balance of Payments?

A

A record of all financial dealings between a country and the rest of the world over a year

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24
Q

What is the Current Account?

A

Trade in goods, services, investment incomes, transfers

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25
What makes up the Current Account?
Balance of trade (X-M), income, country and current transfers
26
What is a current account deficit?
When money leaving the country is greater than money entering the country
27
What is the capital account?
Transactions in fixed assets
28
What is the financial account?
Transactions with changes in the UK's foreign assets and liabilities
29
What makes up the financial account and the capital account?
Direct investment, portfolio investment, financial derivatives, reserve assets
30
What causes a current account deficit?
Low productivity, high inflation rate, high currency value, poor quality/factors of production
31
What causes a current account surplus?
High productivity, low inflation rate, low currency value, good quality/factors of production
32
How can a country reduce a current account imbalance?
Expenditure reducing policies (deflationary fiscal), expenditure switching (protectionism, devaluation), supply side policies
33
What is a floating exchange rate?
Demand and supply determine the exchange rate from one currency to another
34
What is a fixed exchange rate?
A country's exchange rate is fixed in relation to another currency
35
What is a managed exchange rate?
A country's monetary policy committee controlling exchange rates by buying and selling the currency on FX markets and changing interest rates
36
What factors effect the demand and supply of exchange rates?
Interest rates, inflation rates, speculation, FDI (More FDI raises value), current account, quantitative easing
37
What is some government intervention in currency markets?
Interest rates - raising interest rates increases value | Buy your own - central banks buying their own currency would increase its value
38
What are some impacts of changes in exchange rates for inflation?
Price of raw materials and manufactured goods increases after depreciation, could have inflationary consequences
39
What are some impacts of changes in exchange rates for Economic growth and employment?
Increase in competitiveness after devaluation should result in a rise of employment as demand for goods and services rises
40
What are some impacts of changes in exchange rates for FDI flows?
Following a depreciation, it will be cheaper to invest in a country
41
What are some impacts of changes in exchange rates for the Current Account?
Depreciation will increase the competitiveness of a country's good/service by causing a fall in the foreign currency price. However will only improve the current account if the sum for the PED of Imports and the PED for Exports is greater than 1 (Marshall Lerner)
42
What is the Marshall Lerner Condition?
The Current Account will only improve if the sum for the PED of Imports and the PED for Exports is greater than 1
43
What is the J curve?
States that in the Short run, the current account will deteriorate before improving into a surplus in the long run
44
What is international competitiveness?
Refers to a country's ability to sell it's goods and services abroad and determined by price and quantity
45
What measures international competitiveness?
Relative export prices and unit labour costs
46
What factors influence international competitiveness?
Relative unit labour costs, regulation relative to competitors, inflation rate relative to consumers, wage and non wage costs relative to consumers
47
What is poverty?
The state of being poor and not having enough income?
48
What is Absolute poverty?
Individuals not having enough income to have access to sufficient basic resources like food, water and shelter. Typically seen in third world countries, defined as earning less than $1.90 daily by the World Bank
49
What is Relative Poverty?
When a person is poor in comparison to others in their society. Most poverty in developed countries is relative. Defined as earning less than 60% of median income in the EU
50
What factors cause changes in absolute and relative poverty?
FDI, government tax, economic development, economic growth, increased trade
51
What is income?
People's income flows from wages, dividends, etc
52
What is wealth?
Differences in peoples stocks of assets (houses, cars, shares)
53
What does the Gini coefficient depict?
How equal a country is. 0 is absolute equality, 1 is absolute inequality
54
What causes wealth and income inequality within and between countries?
Education, training, skills, progressiveness of tax system, social benefits, wage rate, degree of employment protection
55
What does Kuznet's curve show?
As a country develops, inequality initially increases then decreases
56
Is capitalism necessary for inequality to exist?
In a free market, inequality is inevitable are higher skilled workers earn higher wages. Private ownership of resources also means that some people will obtain more assets than others and can generate a higher income
57
How is HDI measured?
An equal weighting of health (life expectancy at birth(, education (mean years of schooling) and living standards (GNI per capita)
58
What are advantages of HDI?
Accurate, reliable, can track progress over time, determines weak areas, economic and human development measured.
59
What are disadvantages of HDI?
Only assesses 3 factors, does GNI lead to higher living standards, dimensions only change in LR, not SR
60
What are alternative measures to HDI?
Global Happiness Report, Gini Coefficient, GNI, PPP
61
What is economic development?
Measures changes in living standards and quality of life in an economy
62
What is Primary Product dependency?
An over-dependency on the primary sector which can be a significant barrier to growth and development as it can lead to poor development
63
What is the Lewis Dual Sector Model?
States that if there is a shortage of labour in one sector, there will be higher wages in that sector, leading to a transition to a more balanced economy
64
What is capital flight?
When rich domestic people take their money and invest in a foreign country rather than their own due to a better rate of return or corruption at home
65
What is the Savings Gap (Harrod Domar Model)?
States that low income leads to low saving, leads to low investment and low capital accumulation which leads to low income and so on. States that saving is needed to invest and to gain economic development
66
What is the foreign exchange gap?
When a country doesn't attract or have more foreign currency and experiences a huge amount of currency leaving the country
67
What is liquidity?
The degree to which assets can be quickly bought or sold
68
What is the most liquid form of money?
Cash
69
What is the most illiquid form of money?
Physical assets (houses, paintings, cars)
70
What is equity?
The value of assets held by shareholders in a company
71
What is a derivative?
A financial instrument based on the value of other financial instruments
72
What is a bond?
A debt investment, money loaned for a period of time with an interest rate
73
What is a financial market?
A place where buyers and sellers meet to trade securities (bonds, equities, commodities)
74
What are some of the roles of financial markets?
Allows individuals to save and gain more wealth Lend to businesses and individuals Provide the market with liquidity Facilitate the exchange of goods and services
75
What is a money market?
Financial institutions who borrow or lend in the SR and provide the market with liquidity
76
What is the primary capital market?
Raises finance for firms and governments by issuing new bonds and stocks
77
What is the secondary capital market?
Trading bonds and stocks on exchanges (NYSE)
78
What is the FOREX market?
Global decentralised markets for trading currencies needed to import goods or invest in banks or infrastructure
79
What is moral hazard?
A lack of incentive to guard against risk as you know you will be protected from the consequences
80
What is market rigging?
A small number of firms in a market choosing to work together to increase profits and exploit consumers
81
What are the roles of Central Banks?
Implementing of Monetary policy Banker to the banks (lender of last resort) Banker to the government
82
What is the Financial Policy Committee?
Identifies, monitors and takes action to remove systemic risks to protect and enhance the resilience of the UK financial system
83
What is the Prudential Regulation Authority?
Creates policies for firms to follow and watches over firms to ensure they act safely and reduce the chance of getting into financial difficulty
84
What is the Financial Conduct Authority?
Ensures consumers get a fair deal and secure a degree of protection for consumers
85
What is a Credit Crunch?
A sudden shortage of funds for lending and a decline in loans available
86
What is a Systemic Risk?
The possibility that an event at a micro level could trigger instability or collapse of an industry or economy
87
What is Regulatory Capture?
Government failure as the government is too lenient to a business they are regulating
88
What is a GSIB (Globally systematically important bank)
A bank whose risk portfolio is so large and important that if the bank were to collapse, it could trigger a financial crisis
89
What is capital expenditure?
Government expenditure on capital projects (Hospitals, CrossRails)
90
What is current expenditure?
The daily expenditure of the government, such as wages, NHS drugs
91
What are Transfer Payments?
State payments to individuals, such as benefits, JSA
92
What changes the size of the public expenditure?
Changes in income sizes, changing age distributions, changing expectations (tech in healthcare and education), financial crisis
93
What is crowding out?
Extra government spending leads to lower private sector spending
94
What outcomes does public expenditure as a high proportion as GDP have?
Crowding out, low productivity and economic growth, increase in national debt
95
What is a progressive tax?
As income rises, a larger percent of income tax is paid
96
What is the Laffer Curve?
Curve showing tax revenue, where as tax rate rises, revenue rises, but eventually falls
97
What are economic effects of changes in taxes?
Changes in incentives to work, tax revenues, real output and employment, inflation rate, balance of trade
98
What's the difference between Fiscal deficit and national debt?
Fiscal deficit - government spending exceeds tax revenue | National debt - cumulative total debt of government borrowing
99
What's the difference between cyclical deficit and structural deficit?
Cyclical - during a downturn, tax revenue is low and gov spending increases, disappears when the economy returns to trend growth rate Structural - deficit remains when an economy is operating at full potential
100
What are Automatic Stabilisers?
Government spending and taxation that varies automatically during the economic cycle (gov spending increases in a slump)
101
What is Discretionary Fiscal policy?
Deliberate alteration of government expenditure and taxation designed to achieve economic objectives
102
What are direct controls?
Form of controls that work outside the market system, such as maximum and minimum price controls
103
What measures reduce fiscal deficit and national debt?
Government increases taxes and reduces expenditure
104
What measures reduce poverty and inequality?
More progressive tax system, free education and healthcare
105
What measures increase international competitiveness?
Supply side policies to increase productivity, devaluation
106
What problems face policymakers when applying policies?
Inaccurate information, risks and uncertainties, inability to control external shocks

A Level Economics (4 decks)

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