Macroeconomic terms & concepts, Finance And Trade Flashcards
What is aggregate demand?
This is the total level of real expenditure and demand from consumers on goods & services produced within a country (in a given time period)
What makes up aggregate demand?
-Consumption of goods & services
-Investment into capital goods (e.g machinery, technology & equipment that’ll make firms more productively efficient)
-Government spending on public/merit goods
-Exports and imports (balance of trade)
What factors may shift the AD curve to the right?
1.) Increased consumer spending:
-Prices may go down / lower inflation (expansionary supply side policy)
-Cut in taxes (expansionary fiscal policy)
-Interest rates reduced / expansion in supply of credit (loans are easier to get) (expansionary monetary policy)
2.) Exchange rates depreciate (leading to more exports as they’re cheaper for other countries), which may lead to a trade surplus
3.) Increased government expenditure on public goods (e,g infrastructure, healthcare, education):
[for example increased expenditure in transport infrastructure (like 3rd Heathrow runway) can lower production costs for firms as resources will be easier to obtain - therefore economies of scale can passed onto consumers, therefore lowering prices and thus encouraging more consumption]
4.) Increased investment into capital stock (e.g machinery, equipment and technology such as robots that’ll make it easier to produce consumer goods)
What factors may shift the AD curve to the left?
1.) Decreased consumer spending:
-Prices go up (due to inflation)
-Rise in taxes (consumers have less disposable income)
-Interest rates go up (encouraged to save instead of spend)
2.) Exchange rate appreciated in value compared to other currencies (decreasing the export sales as they’ll be more expensive for foreign importers)
3.) Cut in government expenditure on public goods and services
4.) External shocks that effect global supply chains (which leads to goods becoming scarce, thus leading to higher prices and less consumption)
What does it mean if a recession is prolonged?
The economy is in a slump, or a Great Depression (if it hasn’t grown in 3 or so years)
What is aggregate supply?
This is the total quantity of goods and services suppliers are willing to provide within a country at the going market prices
What factors may shift the short range AS curve to the right?
Anything that makes the factors of production cheaper:
-Subsidies for businesses
-Productivity of labour increases
-Input prices (costs associated with raw materials and resources for the production of goods) are lowered
-Taxes on businesses are lowered
-Expectations about Inflation are good
-Imports are cheaper thanks to the appreciation of currency compared to other countries, thus allowing suppliers to provide more
What factors may cause the short range AS curve to shift to the left?
-Subsidies are little to none
-Productivity levels decrease (less productive efficiency)
-Input prices (cost of raw materials and resources) increase
-Import tariffs /quotas (e.g imposed by the EU because of brexit)
-Taxes and regulations imposed on businesses by the government
-Expecting high inflation (suppliers will provide less as they’ll know demand won’t be there)
-External shocks (e.g wars, financial crisis, pandemics affecting global supply chains)
What is the difference between short run and long run aggregate supply?
The SRAS curve is upward sloping, but the LRAS curve is vertical (as the output on the SRAS is affected by the price level, but the potential output on the LRAS isn’t affected by the price level, but rather the economy’s potential)
The LRAS shifts when the potential GDP output changes (when the economy’s potential changes)
What factors may shift the LRAS curve to the right?
1.)An increase in labour force and productivity (thus increasing full employment capacity):
This can be achieved through:
-Investment in human capital such as education and training (Keynesian argument)
-Implementing fiscal policy by cutting taxes to make employees more productive to earn pay rises for more disposable incomes (free marketist argument)
2.) Increased investment in capital stock and technology (which makes production easier, therefore enable output to be maximised to the economy’s full potential)
3.) Decrease in cost production and more efficient resource allocation (achieving X efficiency in minimising wastage, as well as productive & allocative efficiency)
4.) Government subsidies to businesses for R&D (incentivising dynamic efficiency)
Also supply side policies
What factors may shift the LRAS curve to the left?
-A decrease in labour productivity (MRP goes down)
-A decrease in participation rate (because of state dependency - free marketist argument against keynesians/interventionists ; and a lack of education/skills and training - Keynesian argument against free marketist)
-An increase in cost production (maybe due to less investment in capital goods or higher labour costs)
-Government regulations /Taxes on businesses
-Inefficient allocation of resources
What can measure the output produced within a given quantity of labour?
-The output per worker
-GDP per capita
What does it mean when the economy is producing at the maximum level of output?
-It’s producing on the production possibility frontier, meaning there’s no spare capacity/idle resources in the economy
-Once the economy produces at full capacity, the increase/shift in Aggregate demand increases the price level, however the real gdp/ output remains unchanged
Equation for output
Factors of production (e.g land, labour, capital) + Factor productivity (Efficiency)
(This is making use of the factors of production as efficiently as possible in order to maximise output)
How does improving labour productivity lower inflation? (Use this to support Phillips curve)
1.) Supply is increased to the point firms can produce more output without needing to hire additional workers (as output per worker would be maximised), thus meeting demand more effectively, therefore putting downward pressure on prices;
As there’s a lower cost of producing each unit of output, this enables economies of scale, allowing lower prices to be passed onto consumers
What is quantitative easing?
Where the central bank buy the government’s bonds in order to push up their prices and ultimately lower the bond yields (because of their inverse relationship), therefore lowering the borrowing costs for the government and raising finance for government spending ; therefore increasing aggregate demand and catalysing economic growth
Advantages and disadvantages of buffer stock scheme?
Pros:
-Protects countries from shortages (especially in times of crisis like the pandemic, where the global supply chain was disrupted)
-Can prevent cost-push inflation that would’ve been caused as a result of the shortage in supply
-Thus giving those on low incomes a chance to still afford these goods (preventing inequality in consumption)
Cons:
-If not owned by governments, those who own buffer stocks may still choose to raise prices as they’ll have the profit incentive (demand-pull inflation)
-It may be costly to store buffer stocks (as it may require expertise)
What is the difference between GDP per capita and GNI per capita?
GDP per capita looks at the economic output (the average expenditure on goods and services per person) provided per person - basically the spending habits per person
GNI per capita looks at the income earner per person
What is the multiplier effect in terms of government investment?
When government investment into infrastructural projects causes a knock on effect by injecting demand into other services and sectors, therefore increasing GDP:
1.) They create jobs in construction, hospitality and retail, therefore workers can earn wages
2.) This can lead to more tax revenue
3.) Better infrastructure (especially transport) reduces costs, therefore firms can be productively efficient and can afford to hire more employees (further increasing economic activity)
4.) Areas where there’s better infrastructure tend to attract FDI, where foreign companies want to set up, thus leading to further job creation and increased economic activity (meaning GDP rises)
What is crowding out (and how can FDI be bad)?
When foreign companies have competitive advantages because of their resources and therefore outcompete local businesses
FDI can therefore hurt local firms and potentially cause job losses
What is specialisation in trade?
Where countries specialise in exporting certain goods/resources (and import everything they’re not good at producing/exporting), therefore leaving them with a low opportunity cost in production:
Thus giving them a comparative advantage
What is a comparative advantage?
Where countries make use of their scarce resources by concentrating them into what they specialise in producing, giving them an advantage over another country that isn’t so great with producing this good (as they’ll have a lower opportunity cost)
(E.g OPEC like Saudi Arabia have a comparative advantage in crude oil as they’re good at extracting it)
What are the types of trades to specialise in?
-Agricultural specialisation: e.g Ghana are efficient in extracting coffee
-Clothing / Textile industry: Bangladesh & Vietnam are good for cheap labour to produce clothes
-Medical Tourism: Turkey provides popular services such as hair transplants
Benefits & Cons of David Ricardo’s comparative advantage model
By giving up what they’re not good at producing, the benefits are:
-Allocative efficiency: with the use of resources being less wasteful
-Productive efficiency: Output can be increased in the goods that a country is efficient in producing
-The quality of these goods made by the specialist country may improve (through dynamic efficiency)
Cons:
-Transport costs may be high if infrastructure is undeveloped
-The mobility of labour & capital may be restricted due to undeveloped infrastructure or restrictions in trade (e.g with brexit)
-Tariffs may be imposed onto certain countries that export dump as a result of their high comparative advantage (e.g USA on China)
-There may not be fair trade / mutual respect between countries: richer countries may try to exploit the poorer ones
-It assumes both countries have the same quality of the factors of production
What is globalisation?
This is the process in which economies have become more interconnected through:
-The global networks of trade / capital flows;
-And the rapid spread / advancements in technology and the media
What are the benefits of globalisation?
- It’s enabled advancements in communication making it easier for businesses to connect on a global scale
- It’s allowed trade with other countries, therefore allowing countries to gain comparative advantages
-It’s increased competition, with the entry of foreign companies preventing monopolies (providing more choice and lowering prices)
-FDI can be attracted (increasing capital investment and reducing unemployment)
-Freer mobility of capital & labour through advancements in transportation
- Tariffs (as a result of trade protectionist measures) can generate government revenue, therefore reducing budget deficit / can finance government spending
What are the cons to globalisation?
- Countries (like china) may export dump
- Domestic producers may go out of business (like with Tata steel as a result of China’s export dumps)
- This may lead to trade protectionist measures by implementing tariffs
-As a result trade wars may be created on a global scale, leading to unnecessary taxes & regulations imposed on nations (reducing free trade)
- Countries (like the UK) may become too reliant on imports, leaving them vulnerable to external shocks (like warfares & pandemics) that may disrupt supply chains, leading to shortages in the UK
What is the balance of payments
This measures the inflow & outflow of money into and out of a country. It consists of the:
-Current account
-Financial account
-Capital account
What is the current account in the balance of payments?
This measures trade, looking at:
1.) Trade balance (exports & imports of goods & services)
2.) Income (e.g remittances with people working abroad and sending their income back to the country
3.) Transfers (e,g contribution of aid to developing countries in sub-Saharan Africa, fees)
The sum of these can result in a current account deficit or surplus
What are demand side causes for a current account deficit?
1.) Strong domestic growth - this means incomes increase, leading to more demand of foreign goods, therefore increasing imports over exports
2.) Recession overseas: This means incomes overseas are reduced to the point that there’s less demand for exports, meaning exports may fall
3.) Strong exchange rate (imports are cheaper and exports are harder to fulfill as they’re more expensive to foreign importers)
What are supply side causes for a current account deficit?
1.) Low investment into capital stock: this reduces productive capacity as there’d be less production, so therefore less output, meaning we’d have to rely on imports more than exports
2.) Low productivity
3.) High inflation (may lead to high production costs & higher prices for exports, leading to a fall in export sales)
4.) Depletion of resources (exports may decreased, and may have to rely on imports)
How are supply side causes to a CA deficit more detrimental than demand side causes?
Because they’re long term and are much harder to rectify (e.g you can’t just change productivity or production costs over night)
What are the consequences of CA deficit?
-It may reduce economic growth (with AD curve shifting to the left)
-It may increase unemployment (with there being less domestic production as a result of more imports, meaning firms may lay off their workers)
+Price levels (inflation) may go down
How may a CA deficit be a good thing?
If it’s caused by strong domestic growth in incomes (demand side cause) - people’s living standards may be increased as they have higher incomes
According to the Prebisch-Singer hypothesis, why is being dependent on a primary commodity risky for developing countries?
This hypothesis believes that the real prices of primary commodities (such as coffee & cocoa) in the long run decrease in price relative to manufactured goods
This may lead to terms of trade worsening, meaning their growth prospects worsen
Why has Prebisch-Singer’s hypothesis been deemed as pessimistic?
-Manufactured goods have become cheaper because of globalisation and the exploitation of numerous economies of scale (e,g purchasing / technical economies of scale)
-The rising population size / increase in wage growth has increased demand for commodities, meaning primary exporters of commodities in developing countries have seen their terms of trade improve
What is the Harrod-Domar model (and it’s advantage)?
1.) Increase in national savings
2.) Increase in net capital investment in stock
3.) Increased productivity
4.) Rise in real GDP / GNI
5.) Increase household incomes
(Cycle continues)
An increase in national savings may lead to an increased rate of investment into capital stock, therefore increasing output through a rise in productive capacity
What is a criticism of the Harrod-domar model?
The savings gap problem:
-Where low income countries with extreme poverty find it hard to generate enough savings to fund investment into capital & infrastructure in the first place
This would increase reliance on foreign aid / borrowing from overseas, increasing their debt
