Macro Year 2 Flashcards
What is globalisation?
The process in which national economies become increasingly integrated and interdependent
What causes globalisation?
Trade liberalisation, growth of multi-national firms, growth of trade blocs, technological advancements, increased mobility of labour and capital
What are some benefits of globalisation?
Lower prices, greater employment, benefits like WTO and trade blocs, tech transfers and innovation, benefits of economies of scale, freer movement of labour
What are some drawbacks of globalisation?
Growing inequality (trickle down effect), higher structural unemployment, environmental costs, trade imbalances, greater risk of external shock
What is absolute advantage?
Using the same factors of production and producing more of a product
What is comparative advantage?
Producing a product with a small opportunity cost
What are the assumptions in the comparative advantage theory?
Perfect knowledge, constant production costs, no transport costs, no external production costs
What are benefits of specialisation and trade?
Lower prices and more choice for consumers, larger markets and economies of scale, higher economic growth, better living standards
What are drawbacks of specialisation and trade?
Increase of risk from external shocks, global monopolies get bigger, unbalanced development, deficit in trade, environmental damage, increased unemployment
What is bilateral trade?
2 countries agreeing to have equal amounts of trade with each other
What is the formula for terms of trade?
(index of export prices / index of import prices) x100
What factors influence a country’s terms of trade?
Relative inflation rates, relative production rates, changes in exchange rates
What can a change in the terms of trade impact in a country?
Living standards, competitiveness of goods and services, balance of payments, trade surplus and deficit, output, employment
What is a Free Trade Area?
Blocs of countries who agree to abolish trade restrictions between themselves
What is a Customs Union?
Internal free trade for member states who also apply protectionist measures for non-member states (NAFTA, ASEAN)
What is a Common Market?
Internal free trade and movement of factors of production for member states who also apply a set of protectionist measures for non-member states
What is a Monetary Union?
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)
What are benefits of a Monetary Union?
Elimination of transaction costs, price transparency, less exchange rate, increased attractiveness for FDI
What costs of Monetary Union?
Transition costs, loss of exchange rates flexibility, loss of ability to conduct independent monetary policy
What is the World Trade Organisation?
A body who promotes free trade between member countries via trade negotiations and is responsible for solving trade disputes among countries
Why would some countries restrict free trade?
Protect infant and sunset industries, protect employment, correct imbalances on the balance of payments
How can a country restrict free trade? Give examples
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)
What is the Balance of Payments?
A record of all financial dealings between a country and the rest of the world over a year
What is the Current Account?
Trade in goods, services, investment incomes, transfers
What makes up the Current Account?
Balance of trade (X-M), income, country and current transfers
What is a current account deficit?
When money leaving the country is greater than money entering the country
What is the capital account?
Transactions in fixed assets
What is the financial account?
Transactions with changes in the UK’s foreign assets and liabilities
What makes up the financial account and the capital account?
Direct investment, portfolio investment, financial derivatives, reserve assets
What causes a current account deficit?
Low productivity, high inflation rate, high currency value, poor quality/factors of production
What causes a current account surplus?
High productivity, low inflation rate, low currency value, good quality/factors of production
How can a country reduce a current account imbalance?
Expenditure reducing policies (deflationary fiscal), expenditure switching (protectionism, devaluation), supply side policies
What is a floating exchange rate?
Demand and supply determine the exchange rate from one currency to another
What is a fixed exchange rate?
A country’s exchange rate is fixed in relation to another currency
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
What factors effect the demand and supply of exchange rates?
Interest rates, inflation rates, speculation, FDI (More FDI raises value), current account, quantitative easing
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
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
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
What are some impacts of changes in exchange rates for FDI flows?
Following a depreciation, it will be cheaper to invest in a country
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)
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