Macroeconomics

Question 1

Give four costs of Globalisation

Answer 1

1. Free trade damages developing economies without comparative advantage, meaning businesses could shut down leading to structural unemployment
2. Environmental damage from greater trade
3. Outsourcing prices out unskilled labour in developed economies
4. MNCs exploit land and capital of developing economies

Question 2

Give four benefits of Globalisation

Answer 2

1. MNCs train workers, bring capital to developing economies and generate foreign exchange
2. Migration increases, labour gaps get filled, more income tax
3. Lower input costs (outsourcing) means lower prices for goods
4. Higher consumer choice

Question 3

Give four causes of Globalisation

Answer 3

1. Lower transport costs and lower communication costs (development of E-Commerce)
2. Creation of GATT (1947) and subsequent fall in trade barriers
3. More transnational firms (MNCs) mean more FDI, increasing capital flows and global links
4. Fall of socialism, restoration of capitalism in China (1991)

Question 4

Define - Globalisation

Answer 4

The integration of the world’s national economies into a single international market

Question 5

Define - Containerisation

Answer 5

The process of standardising shipping containers and shipping equipment (Introduced in 1956)

Question 6

20 Mark Question Breakdown

Answer 6

14 (3 Analysis points) - Application inc.
6 (3 Evaluation points)

24 minutes = 17 Minutes Analysis + 7 Minutes Evaluation

Question 7

Give the names and countries involved in four trade blocs

Answer 7

1. ASEAN - Southeast Asian Economies
2. CIS - Post-Soviet States
3. NAFTA - North American Economies
4. EU - European Economies

Question 8

Give four thing which affect the pattern of trade

Answer 8

1. Creation of Trade Blocs
2. Former soviet countries with low production costs being opened up to trade in 1991
3. Newly industrialised countries such as China and India who have increased their share of manufacturing exports due to low cost production
4. Shifting exchange rates

Question 9

Define - Trade Creation

Answer 9

The increase in economic welfare from joining a free trade area, such as a customs union

Question 10

Define - Trade Diversion

Answer 10

Where trade is diverted from a more efficient exporter towards a less efficient one by the formation of a free trade agreement

Question 11

Give four benefits to specialisation and trade

Answer 11

1. Specialisation by comparative advantage results in higher world output
2. Economies of scale (able to sell to bigger market)
3. More innovation and consumer choice
4. Greater competition

Question 12

Define - The Heckscher-Ohlin Model

Answer 12

The model says that countries will export products that use their abundant and cheap factors (endowments) of production and import products that use the country’s’ scarce factors

Question 13

Define - The Linder Hypothesis

Answer 13

A theory that suggests nations with similar demands would develop similar industries. These nations would then trade with each other in similar, but differentiated goods

Question 14

Define - Factor Endowments

Answer 14

The amount of land, labor, capital, and entrepreneurship that a country possesses and can exploit for manufacturing

Question 15

Give four costs to specialisation and trade

Answer 15

1. Countries can become overdependent
2. Structural unemployment as industry priorities shift
3. Lacking diversification in exports increases risk
4. Benefits may just go to developed economies or the rich, increasing inequality

Question 16

Define - Absolute Advantage

Answer 16

The ability to produce a good more efficiently (e.g with less labour)

Question 17

Define - Comparative Advantage

Answer 17

The ability to produce a good relatively more efficiently (e.g at a lower opportunity cost)

Question 18

Define - The Law of Comparative Advantage

Answer 18

A theory arguing that there may be gains from trade arising when countries (or individuals) specialize in the production of goods or services in which they have comparative advantage

Question 19

What is the formula for the opportunity cost of producing an additional unit of Item A where Item A is one of two items an economy can produce?

Answer 19

Item B/Item A

Question 20

Given a table which shows the cost per unit of producing two goods in two countries in labour hours how do you find the maximum amount of good A Country A can produce given one unit of resource?

Answer 20

Swap the cost of good A in Country A with good B in Country A

Question 21

What is the key nature of a country’s PPF which has absolute advantage in both goods relation to the other country?

Answer 21

Their PPF’s never intersect, the one with absolute advantage is always greater than the other

Question 22

Give the default comparative advantage table

Answer 22

Australia: 300 sleds or 2 clarinets and Brazil : 200 sleds or 1 clarinet. Brazil had lowest opportunity cost in sleds, and have absolute advantage in neither

Question 23

Give four WTO (with their primary mandate being to liberalise trade) rules

Answer 23

1. Not allowed to discriminate unless part of free-trade areas and customs unions
2. Quotas are not allowed
3. If one county benefits from another’s’ tariff reductions, they must reduce tariffs themselves
4. Fair competition and few barriers

Question 24

Give 4 different types of trading blocs

Answer 24

1. Preferential trade area, giving preferential access to certain products
2. Free trade area where trade barriers are eliminated between them
3. Customs Union is free trade area with CET
4. Economic and Monetary Union with fixed exchange rate/single currency and common macroeconomic policies

Question 25

Define - CET

Answer 25

Common external tariffs placed on imports from outside a free trade area

Question 26

Give three factors of a Common Market

Answer 26

1. Common law
2. Common taxation
3. Free movement of labour, capital etc…

Question 27

Define - Hot Money

Answer 27

Capital which is frequently transferred between financial institutions in an attempt to maximize interest or capital gain

Question 28

Give four conflicts between Trade Blocs and WTO

Answer 28

1. Trade Blocs could distort world trade
2. Trade Blocs are discriminatory
3. Trade Blocs have conflicts with each other
4. WTO losing power at the hands of large blocs and agreements

Question 29

Define - Breadbasket/Ricebowl

Answer 29

xAn area of high fertility, soil and good climate which allows for ideal agricultural growing conditions

Question 30

Define - Quota

Answer 30

An agreement by a country to limit its exports to another country to a given quantity

Question 31

Describe the steps to drawing a tariff diagram

Answer 31

1. Draw Price and Quantity axis
2. Draw domestic supply and demand
3. Draw world price across as world supply beneath equilibrium point
4. Draw tariff price across as world+tariff supply beneath equilibrium point but above world supply
5. Area between two prices and domestic supply is gain in producer surplus, loss in consumer surplus
6. Area between two prices and new import quantities is gain in government revenue, loss in consumer surplus
7. Remaining two triangles between prices either side of government revenue are deadweight loss

Question 32

Describe the steps to drawing a quota diagram

Answer 32

1. Draw Price and Quantity axis
2. Draw world domestic supply and domestic demand
3. Draw world price below equilibrium, marking the difference which imports must make up between domestic supply and domestic demand
4. Shift out domestic supply by the quota amount to get world supply
5. Draw this new equilibrium and hence find the new higher price, new quantity supplied domestically and smaller quantity of imports
6. Foreign producers get the square between the two prices, and the two new import amounts
7. Domestic producers get the trapezium between the two prices and domestic supply as extra producer surplus
8. Two triangles left between prices are deadweight loss

Question 33

Give four restrictions to trade

Answer 33

1. Quotas
2. Tariffs
3. Subsidies to domestic producers
4. Non-tariff barriers (administrative barriers)

Question 34

Give four reasons for protectionism

Answer 34

1. Anti-dumping measures
2. Response to large trade deficits
3. Infant industries
4. Protect key/politically strategic industries

Question 35

Give two effects of protectionism as stated by OECD

Answer 35

1. Import barriers raise domestic prices through higher costs for intermediate inputs
2. Each dollar of increased protection leads to a drop of 66 cents in GDP

Question 36

Define - Current Account

Answer 36

The account made up of trade in goods, trade in services, income from investment and employment and transfers

Question 37

Give the four components of the current account

Answer 37

1. Trade in goods
2. Trade in services
3. Primary income (UK earnings from direct investment)
4. Secondary income (General government transfers

Question 38

Define - Capital and Financial Account

Answer 38

The account which records the flows of capital and finance between the UK and the rest of the world (FDI - Long Term Flow, Portfolio Investment - Short Term Flow)

Question 39

Define - FDI

Answer 39

The net inflows of investment to acquire a lasting management interest in an enterprise operating in a foreign economy

Question 40

Define - Portfolio Investment

Answer 40

The purchase of shares and bonds in international capital markets

Question 41

Define - Reserve Assets

Answer 41

Foreign financial assets that are controlled by monetary authorities, used to finance deficits and deal with imbalances

Question 42

What are the three components of the Balance of Payments?

Answer 42

1. Current Account
2. Capital and Financial Account
3. Net errors and omissions

Question 43

Give four factors that are likely to worsen a current account

Answer 43

1. Consumer led economic growth (through expansionary fiscal or monetary policy) which boosts consumer spending on imports
2. High inflation in domestic economy
3. High relative wages = low relative competitive exports = high relative imports
4. Low labour productivity = low relative competitive exports = high relative imports

Question 44

Give three factors that are likely to increase a surplus on the financial account

Answer 44

1. Having a higher rate of return on investment domestically than abroad means more foreign ownership of domestic assets than domestic ownership of foreign assets
2. Having lower risk domestically with investments than abroad means more foreign ownership of domestic assets than domestic ownership of foreign assets
3. A weaker domestic currency (£1:$1.20 -> £1.20:£120) makes foreign currency more expensive, making investment less profitable, meaning less domestic ownership of foreign assets and more foreign ownership of domestic assets

Question 45

When does a current account deficit matter? Give four instances

Answer 45

1. If it is a large proportion of GDP
2. If the country has other liabilities which also characterise its external debt
3. If trust in the country breaks down and they can no longer secure financing (borrowing)
4. If the country are not using such borrowing to finance investment for long-term growth but rather just consumption

Question 46

A current account deficit is financed by a surplus on the capital account and the _ which this surplus builds up

Answer 46

Liabilities

Question 47

Give three policies which can reduce a trade deficit or prevent it from getting worse

Answer 47

1. Contractionary aggregate demand policy to reduce expenditure and push domestic producers to turn away from suppressed domestic markets and to export markets
2. Protectionist policies such as subsidies to domestic producers or trade barriers
3. Devaluation means foreign currency is more expensive, making import prices go up. Also domestic currency is cheaper for foreigners, meaning export demand goes up
4. Supply-side policy with relative unit labour cost improvements, increasing productivity or reducing wages

Question 48

Evaluate contractionary policy as a means to reduce trade deficits, give two points

Answer 48

1. Only short run concern, does not increase competitiveness

2. Raised interest rates increase demand for pounds , raising exchange rate and making imports cheaper

Question 49

Evaluate devaluation as a means to reduce trade deficits, give two points

Answer 49

1. J-Curve, in the SR devaluation makes deficit worse as ML doesn’t hold, in the long run it does which makes deficit get better
2. If PED for a product is low, devaluation is irrelevant and people will still import that like US and oil (past)
   3.

Question 50

Define - Relative Unit Labour Costs

Answer 50

Wages/Output relative to other countries

Question 51

Give two examples of supply side policy to reduce wages through increasing labour

Answer 51

1. Immigration
2. Reducing structural unemployment by education/training where there are skill mismatches or relocation programmes if geographical immobility is a problem
3. Frictional unemployment can be reduced if welfare payments are made less generous, so that search times between jobs are reduced -
4. Voluntary unemployment can be reduced if tax rates are cut such that income from employment increases

Question 52

Give four examples of supply side policy to reduce costs through improving productvitity

Answer 52

1. Increase labour productivity Y/L through education, training and healthcare
2. Improve capital productivity Y/K through making more RnD friendly regulation or offering subsidies -
3. Reducing a government size (expenditure) through privatisation of firms such that those business are subject to market forces and the profit motive and hence become more productive
4. Increasing competition in markets either through cutting costs through deregulation or increasing competition through demerging monopolies

Question 53

Evaluate supply side policy, give four evaluation points

Answer 53

1. Spending on education and healthcare doesn’t necessarily imply that it improves , money could be wasted
2. Some countries have proved productive with high government intervention in the past
3. Supply-side reform takes a long time as there is time-lag, consider education for example
4. Supply-side reform meets political opposition

Question 54

Explain why the balance of payments must always balance

Answer 54

If a country is a net exporter and thus have a surplus on the current account this means that they are acquiring more of foreign capital than foreign countries are acquiring of theirs. Because capital assets must always return to their country of origin to be invested, this gives said domestic country more finance to purchase and invest in foreign assets than foreign owners finance to purchase and invest in domestic assets. Because the financial/capital account is foreign ownership of domestic assets - domestic ownership of foreign assets there is net capital outflow and a deficit on this account which balances the surplus on the current account. Pounds out = pounds in

Question 55

Give four implications of global imbalances

Answer 55

1. Possibility of financial crises and contagion
2. A reduction of future productive
   capacity and growth rates for nations who are running financial account deficits
3. Accumulating foreign currency reserves cost in the form of the returns foregone by holding them in the form of traditional reserve assets rather than higher-yielding assets
4. Global overproduction is carefully balanced by global over consumption, when this balance breaks a crisis ensues and growth slows down

Question 56

Define - Dutch Disease

Answer 56

the negative impact on an economy of anything that gives rise to a sharp inflow of foreign currency, such as the discovery of large oil reserves

Question 57

Give four factors which influence exchange rates

Answer 57

1. Exports and imports
2. Speculation - Speculation of an increase in the value of a currency increases its demand
3. Relative inflation rates - Low inflation makes products cheaper which encourages demand for said currency to buy products
4. Relative interest rates - High interest encourages demand for said currency

Question 58

Give four likely effects of an decrease in the exchange rate

Answer 58

1. Imports get more expensive and exports are cheaper
2. More internationally competitive
3. Cheaper to purchase currency and hence investment could increase in domestic country
4. Expensive imports leads to higher domestic demand which means firms have less incentive to cut costs, leading to inflation

Question 59

Give four benefits to the Euro

Answer 59

1. Transparency as producers and tourists can more easily compare the prices of international goods, services and resources
2. Lack of exchange rate fluctuations creates certainty and the ability to predict costs, which increases investment
3. Trade creation as a single currency removes the exchange rate obstacle to trade, boosting exports
4. Countries can’t use devaluation which means that they can’t induce inflationary pressures

Question 60

Evaluate the benefits to the Euro

Answer 60

1. The easy comparison of prices and hence downward pressure on prices through making firms have to be more efficient is partly cancelled out by transport costs across the eurozone
2. Certainty and investment is the most significant benefit because it results in job creation, improved competitiveness and higher growth rates
3. Trade diversion takes place due to CET and thus trade may just be between inefficient producers inside the Eurozone
4. There is unemployment and a fall in GDP in the short-run if you can’t devalue the currency to improve the balance of trade

Question 61

Give four costs to the Euro

Answer 61

1. Eurozone isn’t an Optimal Currency Area
2. Loss of independence of monetary policy which prevents economies from dealing with asymmetric shocks
3. Can’t capitalise on a floating exchange rate to devalue a currency in response to crises
4. Loss of fiscal independence which means large budget deficits are penalised

Question 62

Evaluate the costs to the Euro

Answer 62

1. Monetary policy between England and the Eurozone is similar
2. Lack of fiscal independence may be good to prevent countries from generating budget deficits which they cannot pay back
3. Benefits of devaluation are only temporary or cause inflation via the increased cost of imports

Question 63

Define - Optimum Currency Area

Answer 63

A geographical region that has a fairly homogenous economy that would cope with a single currency and a single interest rate

Question 64

What are the three key criteria for a successful currency union?

Answer 64

1. Labour mobility across the region
2. Capital mobility and price and wage flexibility
3. Must be cyclical convergence (all countries on same phase of business cycle)

Question 65

Give three measures of competitiveness

Answer 65

1. Relative unit labour costs - Rising costs mean UK is becoming less competitive
2. Relative export prices - Rising relative export prices mean export prices in UK are rising faster or falling slower than those in other countries the UK trades with, making UK less competitive
3. Export prices to import prices - If export prices are rising significantly faster than import prices then the country is likely to be losing international competitiveness

Question 66

Give four factors influencing competitiveness

Answer 66

1. Exchange rate - Rise in UK exchange rates make UK goods less price competitive abroad (depends on PED, low PED means little change) however if firms keep foreign currency prices the same, international competitiveness will not change however domestic profits will decrease
2. Productivity Rises in UK’s productivity relative to main trading partners will increase competitiveness
3. If wage and nonwage costs ie. pensions and taxes go down, UK will be more internationally competitive
4. Higher regulation increases industry costs which reduce international competitiveness

Question 67

Define - SPICEE

Answer 67

Strong Pound Imports Cheap Exports Expensive

Question 68

Define - Value of Exports and Imporve

Answer 68

Price of Exports/Imports x Quantity of Exports/Imports

Question 69

Define - Expenditure Reducing Policy

Answer 69

Government policies to reduce the level of aggregate demand in order to reduce imports and boost exports

Question 70

Define - Expenditure Switching Policy

Answer 70

Government policies to switch production currently being sold domestically, to exports

Question 71

Define - Depreciation

Answer 71

A natural fall in the value of the exchange rate

Question 72

Define - Appreciation

Answer 72

A natural increase in the value of the exchange rate

Question 73

Define - Currency Controls

Answer 73

Controls on the purchase of foreign currency by domestic citizens and firms

Question 74

Define - Marshal-Lerner Condition

Answer 74

This condition states that the value of imports only falls and the value of exports only rises after the depreciation of a currency if the PED of Imports + PED of Exports is greater than one, meaning they are relatively elastic which would allow price changes of imports and exports to be easily responded to with quantity changes (PEDx + PEDm > 1)

Question 75

Define - Absolute Poverty (World Bank)

Answer 75

Those living on below $1.90 at purchasing power parity per day at constant 2011 prices

Question 76

Define - Relative Poverty

Answer 76

Situation obtaining if household income falls below X% of median adjusted household disposable income (X=60 in the UK)

Question 77

Define - Gini-Coefficient

Answer 77

A proportion and measure of variance which shows how close to perfect equality a country is and hence how evenly its income is distributed

Question 78

What happens to areas A and B, and the Gini-Coefficient as income is redistributed to the top of the earnings ladder?

Answer 78

Area A gets bigger, Area B get’s smaller, and so A in proportion to A+B is bigger. The Lorenz curve moves closer to the line of perfect inequality and so gini-coefficient is greater

Question 79

What are the x and opposite y axes on a lorenz curve diagram?

Answer 79

X-axis is cumulative share of people from lowest to highest incomes
Y-axis is cumulative share of income earned

Question 80

What is Millennium Goal 1?

Answer 80

Half the people in extreme poverty and hunger by 2015, this was achieved in 2010. A new target was set in 2015 to eradicate poverty by 2025

Question 81

What is Millennium Goal 2?

Answer 81

Universal primary education (100% children complete primary schooling)

Question 82

What is Millennium Goal 3?

Answer 82

Gender equality (eliminate gender disparity)

Question 83

What is Millennium Goal 4?

Answer 83

Reduce child mortality by 2/3 by 2015

Question 84

What is Millennium Goal 5?

Answer 84

Reduce maternal mortality ratio by 3/4 by 2015, target still not met

Question 85

What is Millennium Goal 6?

Answer 85

Combat HIV, Malaria, etc..

Question 86

What is Millennium Goal 7?

Answer 86

Ensure environmental sustainability (half the amount of people without access to sustainable drinking water) some progress has been made

Question 87

What is Millennium Goal 8?

Answer 87

Develop global partnership for Development (ODA, Debt Sustainability and Market Access) some progress has been made, not much though

Question 88

Give four measurements for standard of living

Answer 88

1. GNI/Capita at PPP
2. HDI
3. Doctors relative to population

Question 89

Define - GNI

Answer 89

GNI, Gross National Income, is GDP + Net Income from Abroad

Question 90

What factors of standard of living does GNI not cover and hence make it unsuitable as a measurement

Answer 90

1. Social indicators
2. Level of inequality
3. Informal sector

Question 91

What did Kuznets believe to be the relationship between development and inequality?

Answer 91

He believed that over time, the first movers would have higher incomes which would increase inequality, however over times all the others catch up and hence suggests that capitalism tends to reduce inequality over time

Question 92

What did Picketty believe to be the relationship between development and inequality?

Answer 92

He suggests Kuznets looked at a specific period of time around the first world war where labor had died and thus was scarce, increasing wages for low skilled jobs and so reducing inequality. He looked at inequality after, at around 1980, and empirically itbegins to increase again

Question 93

Give four reasons why income inequality has gotten worse from 1974 in the UK

Answer 93

1. Changing structure of the economy led to the elimination of middle income jobs for the masses and the creation of high and low paid jobs
2. Trade unions had their power suppressed by Thatcher after 1979, meaning labour cannot bargain for higher wages
3. Skilled immigration ending up in unskilled lowers unskilled wages while raising skilled wages and hence increasing the gap
4. The welfare state means that employers don’t have to pay employees as much as they would usually have to as the employee wage is topped up by the government. This increases the employer’s earnings and decreases the employee’s earnings (only pre-tax transfer gini-coefficient will show greater inequality)

Question 94

30 Mark Question Breakdown

Answer 94

21 (4 Analysis points) - Application Inc.
9 (4 Evaluation points)

36 Minutes = 25 Minutes Analysis + 11 Minutes Evaluation

Question 95

What are on the x and y axes on Kuznets and Picketty’s displays of the relationship between capitalism and inequality

Answer 95

X-axis - Development

Y-axis - Gini-coefficient

Question 96

Define - Capitalism

Answer 96

Private ownership of resources and free enterprise

Question 97

Give four reasons why inequality is an essential ingredient of capitalism

Answer 97

1. Private ownership of resources means those who own them will tend to become relatively richer to those who don’t
2. More productive workers are paid more which gives them incentive to be productive
3. Entrepreneurship is fueled by a profit motive and hence the more innovative and successful the more profit, providing this incentive for firms to improve
4. Private ownership of property ensures inheritance which solidifies inequality

Question 98

Give three reasons as to why inequality may not be an essential ingredient of capitalism

Answer 98

1. Degree of inequality could vary between different capitalist systems
2. Could be reduced by government policy
3. Capitalism is reducing global inequality through globalisation and the spread of resources + greater market access

Question 99

Define - Low Level Equilibrium Trap

Answer 99

Countries with low income per capita have less savings, which in turn means low investment, limited capital which restricts growth and keeps income per capita low

Question 100

Define - Rostow’s Stages of Economic Growth

Answer 100

A process described by Rostow, which set out five stages through which he claimed that all developing countries would pass

Question 101

Explain Rostow’s Five Stages of Economic Growth

Answer 101

1. Traditional society - Low investment in agrarian economy. Income per capita is static
2. The preconditions period - Increases in agricultural productivity, allowing resources to be released. Important that resources devoted to provision of infrastructure
3. Take-off - 20/30 year period of growth, with investment rising relative to GDP. Emergence of entrepreneurs. A flow of funds for investment is most needed at this stage
4. Drive to maturity - New sectors emerge to complement leading sectors. Investment is relatively high proportion of GDP
5. Age of mass consumption - Fully diversified, consumption takes highest proportion of GDP.

Question 102

Define - Dependency Theory

Answer 102

The notion that the countries of the world can be divided into core and periphery, and that countries in the core developed by exploiting those in the periphery

Question 103

Give three reasons why growth may lead to development

Answer 103

1. Growth results in higher income which allows people to increase savings, which increase investment, which can then be taken by entrepreneurs and invested to improve the quality of infrastructure
2. Growth results in higher incomes and more tax revenue which results in increases in spending on health services, lowering mortality rates, which would have an impact on HDI
3. Countries lifted from absolute poverty (higher income per capita) from growth directly experience improvements in development due to lower crime and less poverty

Question 104

Give two reasons why growth may not lead to development

Answer 104

1. Growth can increase inequality through the increased wealth being unevenly distributed
2. Growth that is not sustainable means that when it can no longer sustained development gains could be reversed, for example the

Question 105

Define - Desertification

Answer 105

The process by which fertile land becomes desert, typically as a result of drought, deforestation, or inappropriate agriculture

Question 106

Define - Economic Growth

Answer 106

A long-term expansion of the productive potential of the economy

Question 107

Define - Economic Development (Todaro)

Answer 107

An improvement in the standard of living - including availability of life-sustaining goods, education, cultural and human values, more jobs, higher incomes and freedom to make economic and social choices

Question 108

Define and explain each variable in the Harrod-Domar formula: g = s/k

Answer 108

g: Output growth rate which is assumed to be fixed when s and k are fixed
s: Savings ratio which due to the Harrod-Domar visualisation (Income->Saving->Investment->Capital accumulation) suggests the higher the savings ratio, the more investment and hence the more capital accumulation
k: Capital:Output ratio, which the lower it is, the more efficient capital is and hence the higher the growth rate

Question 109

Define - HDI

Answer 109

Human Development Index which is used to measure human development by combining life expectancy, education, and income per capita indicators

Question 110

Define - Savings Gaps

Answer 110

In many smaller low-income countries, high levels of poverty make it almost impossible to generate sufficient savings to provide the funds needed to fund investment projects

Question 111

Give two reasons as to why poor infrastructure is a limit to growth and development

Answer 111

1. Poor Infrastructure causes higher supply costs and delays for businesses
2. Reduces labour mobility, a necessary characteristic of a developing labour force who could switch between industries that are structurally changing

Question 112

Give two reasons as to why human capital inadequacies are a limit to growth and development

Answer 112

1. Lack of entrepreneurs means a lack of people who are able to effectively invest and take risks in order to drive growth in the Harrod-Domar model
2. In an increasingly globalised world it is hard for developing countries to sustain their human capital as it frequently goes elsewhere (Brain Drain)
3. Left to itself the free market will under-provide education and health (MSC = MPB is free market equilibrium. With healthcare MSB is higher than MPB therefore it is shifted out Ad Valorem from the top. MSB = MSC is the socially optimum equilibrium, thus the free market under provides this)

Question 113

Evaluate the causes of globalisation

Answer 113

1. WTO Doha round was comparatively a failure to the GATT tariff reductions and trade blocs are taking the place of universal trade reduction
2. Technology cannot outweigh government policy because if trade barriers remained erect countries would not experience this cause of globalisation
3. Eastern Europe has not played a transformative role in the international economy, and the transition to the market in some countries has been painful and is incomplete including Russia

Question 114

Give four reasons as to why primary product dependency is a limit to growth and development

Answer 114

1. Productivity in Primary Production is low and hence there is less scope for growth if a country does find itself with this dependency
2. Terms of trade move against primary product exporters. Prices for primary production tend to rise (as demand rises more slowly) more slowly than prices for manufactured goods. Hence prices for exports usually rise relatively slowly compared to prices for imports
3. Primary products are volatile. Demand is volatile for commodities because they follow the economic cycle, supply is volatile for agricultural goods because of climate. This creates uncertainty which harms investment and thus growth
4. Leads to a neglect of the broader economy because of natural resource endowments

Question 115

Evaluate Primary Product Dependency as a constraint on growth and development

Answer 115

1. Countries with Primary Product Dependency may just have it because of comparative advantage
2. May be better than the alternative, industrialization, which, if agriculture isn’t reformed, may have dire consequences

Question 116

Define - Prebisch-Singer Hypothesis

Answer 116

There would be a long-term decline in the terms of trade of primary-commodity exporters due to a low income elasticity of demand

Question 117

Define - Terms of Trade

Answer 117

The ratio of export prices to import prices (Px/Pm)

Question 118

Define - TEA

Answer 118

Total early-stage Entrepreneurial Activity: percentage of 18-64 population who are either a nascent entrepreneur or owner-manager of a new business

Question 119

Define - Primary Product Dependency

Answer 119

The dependence of developing countries on primary production (agricultural goods and commodity extraction)

Question 120

Give two reasons as to why a savings gap is a limit to growth and development

Answer 120

1. The first issue of a savings gap is that if you lack savings you lack investment which (being the main drivers of growth in the Harrod-Domar model) mean capital accumulation is limited and hence growth
2. Savings gaps could be caused by low-incomes which means most incomes go towards consumption rather than saving. To increase GDP and hence incomes nations may attempt to lower interest rates to encourage borrowing and hence investment, however this still discourages saving

Question 121

Give two problems associated with declining terms of trade

Answer 121

1. Countries have to use resources to produce more exports which could have been used to purchase more capital had the terms of trade not declined
2. It will also be more difficult to earn more foreign currency to pay external debt

Question 122

Evaluate the problems of a declining terms of trade

Answer 122

1. Depends on PED also, as when export prices fall (if they fall), demand will increase by a larger amount if it is elastic
2. Short term decline is most likely temporary volatility, however a long term decline is more indicative of a fall in the standard of living

Question 123

Give two reasons as to why a foreign exchange gap is a limit to growth and development

Answer 123

1. Lack of foreign exchange means inability to finance imports of consumer goods and services, raw materials and components and new capital inputs
2. Also restricts ability to repay external debt, which means that the economy is still restricted by debt agreements (‘Original Sin’)

Question 124

Define - ‘Original Sin’

Answer 124

The proposed fact that most countries are not able to borrow abroad in their domestic currency

Question 125

Give four causes of capital flight

Answer 125

1. When a country’s currency is under strong downward pressure because of speculative selling
2. A steep fall in asset prices
3. Weakening faith in the creditworthiness of a national government especially when they are running up large budget deficits that might be unsustainable
4. If they investors expect huge taxes on their investments

Question 126

Define - Capital Flight

Answer 126

An outflow of money from one country to another as investors lose faith and confidence in their external investments

Question 127

Give two reasons why capital flight is a constraint on growth and development

Answer 127

1. It suggests that investors are losing faith in the government which could have knock on effects of giving that country a bad reputation and discouraging new investors
2. Immediately it means less funds for investment are available, and less investment itself, which (as seen through Harrod-Domar) means less capital accumulation

Question 128

Give three reasons why corruption is a constraint on growth and development

Answer 128

1. Willingness to invest ultimately goes down because firms and individuals have no security on their invested money (if they try to dispute bad transactions, the corrupt judge could find not in their favour)
2. Price distortion and increased costs of public projects because bribes are paid to gain contracts and those who get the contract don’t have to be cost efficient, diminishing public benefit from schools and hospitals
3. A covert, upward redistribution of wealth takes place within society because those at the bottom of society who don’t receive bribes are ones that are forced to pay them the most

Question 129

Give two reasons why rapid population is a constraint on growth and development?

Answer 129

1. Quite simply GDP may rise, but GDP per capita, due to rapid population growth and an increase in the quantity of dependents, may be falling
2. Has environmental consequences such as deforestation as a need to keep up with population food and space demands -

Question 130

Define - The Demographic Transition as well as the ‘Window of Opportunity’

Answer 130

Stage 1: Population growth is slow. High birth rates + high death rates
Stage 2: Rapid population growth. High birth rates + Falling death rates
Stage 3: Population stabilises. Birth rates begin to decline

‘Window of Opportunity’: Early part of Stage 3 where a large work force emerges which is not only beneficial in the obvious sense but also because it is assumed the middle age save more than the elderly, which increases investment (Harrod-Domar)

Question 131

Define - Dependency Ratio

Answer 131

The ratio of dependants (economically inactive people to the economically active. Dependents include children below working age and old age pensioners, students and housewives

Question 132

Define - Malthusian Population Theory

Answer 132

Malthus suggested that population grows exponentially, and yet food grows arithmetic. Thus we will reach a point where population exceeds the food supply, which will result in famine and hence a fall in population beneath this line. Thus he urged population control

Question 133

What do the Malthusian Population Theory diagrams look like and what did Boserup suggest instead?

Answer 133

1. Exponential from the origin at some point intersecting with a linear line that cuts the y-axis above the origin and has a positive gradient
2. Linear line with positive gradient from the origin for population and upon intersecting with another linear line of lesser gradient that represents food supply and cuts the y-axis above the origin, it curves back down across the line, and follows the line periodically in this manner

Boserup suggested that the problem wasn’t the rising population that was the issue, but the war and disease which limited the food supply and the distribution of food, not the quantity

Question 134

Give two reasons why debt is a constraint on growth and development

Answer 134

1. Debt overhang means that government find it harder to borrow money so external means of investment are harder to come by -
2. Internal investment done with pre-existing resources is directly limited due to the opportunity cost of having to use these resources instead to pay off debt

Question 135

Give two reasons each why autocratic and democratic governments can be a constraint on growth and development

Answer 135

Autocratic

1. If the government does not fear revolutions, then it can do what it likes
2. Decision making will be inefficient if they use office for their own ends

Democratic

1. Rent seeking or seek to gain short run popularity at the expense of long run maximisation -
2. Decision making processes to respond to economic issues will be slow

Question 136

Give two reasons each why autocratic and democratic government may NOT be a constraint on growth and development

Answer 136

Autocratic

1. If government fear revolution then they may be responsive to the demands of the population
2. May not be negatively correlated with bad institutions and corruption

Democracy

1. Government responds to people because of the election
2. May be positively correlated with good institutions and low levels of corruption

Question 137

Give four reasons why conflict and civil war may be a constraint on growth and development

Answer 137

1. Destroys physical capital
2. Opportunity cost to labour used for fighting and investment used for military capital
3. Human capital is lost if they die while fighting
4. Lack of rule of law and conflict decreases economic investment incentives from abroad

Question 138

Give two reasons why lack of financial institutions is a constraint on growth and development

Answer 138

1. Required to match savers with borrowers and hence ensure S=I leads to capital accumulation (Harrod-Domar)
2. Formal financial institutions in developing countries focus on medium to large enterprises deemed creditworthy. These institutions tend to be inefficient and provision for the poor is low (Opportunity cost)

Question 139

Define - Fiscal Policy

Answer 139

The use of Government Spending and Taxation to manipulate aggregate demand, usually with the objective of stabilising output at its potential Y-Bar

Question 140

Explain Expansionary Fiscal Policy

Answer 140

Expansionary Fiscal Policy is increasing the gap between G and T assuming G > T in order to increase AD either directly through G or through cutting T which increases C (and I, maybe X). Done when output is beneath Y-Bar to get the economy back to potential output

Question 141

Explain Contractionary Fiscal Policy

Answer 141

Contractionary Fiscal Policy is narrowing the gap between G and T reducing the budget deficit or running a budget surplus. Done when output is above Y-Bar to get the economy back to potential output

Question 142

Evaluate Fiscal Policy (3 Points)

Answer 142

1. The size of the multiplier (the ratio of a change in expenditure to the resulting change in income) 1/MPW. If MPW is high, perhaps because of savings, the multiplier will be low, and hence AD will shift out a second time less
2. Crowding out (movement along PPF upwards where x axis is private sector and y-axis is public sector). For example in the market for loanable funds, because demand shifts out when G>T, interest rates rise, which reduces private sector consumption and investment
3. The problem of fine tuning. By the time the government identifies a slump or boom, and design policy to tackle it, the time it takes for that to get through the economy could have already partially recovered or declined, exacerbating the economic cycle (upward GDP against time becomes jagged rather than smooth - potential output line still runs through the middle)

Question 143

Explain Automatic Stabilisers

Answer 143

In a recession automatically the balance moves towards a budget deficit as taxes are low from less employment and spending is high on welfare, making policy automatically expansionary through increasing G and reducing T. The opposite is the case in a boom (Diagram is G,T against Output. T is exponential, G is linear and downward sloping, where they cross has output Y-Bar, beneath this is recession and above is boom with the gap between being deficit or surplus)

Question 144

Define - Monetary Policy

Answer 144

The use of the money supply and interest rates to manipulate aggregate demand and thus control economic variables

Question 145

Explain Monetary Policy (With regards to an increase in the interest rate)

Answer 145

The United Kingdom Central Bank uses its repo rate to alter the money supply. It supplies cash to commercial banks by buying bonds. with an agreement that they will repurchase bonds at a later date (Repo rate against quantity of bonds with supply of bonds curve exponentially decaying). A raise in the interest rate means banks will be willing to supply less bonds and hence get less liquidity and thus there is less money in the banking system. This means supply in the figurative money market falls which raises interest rates (Interest rates against quantity. Downward sloping demand and fixed quantity of money supply shifting to the left - Similarly in the market for loanable funds, r against q, where supply is upward sloping and demand is downward sloping, supply shifts in, raising interest rates

Question 146

What is the Bank of England’s mandate to use monetary policy for?

Answer 146

To keep inflation within 1% of 2%

Question 147

Give the four key channels of the MTM for high base rate

Answer 147

1. High base rate means market rates increase i.e. mortgage rates which means domestic demand falls as borrowing for investment falls, meaning total demand falls meaning domestic inflationary pressure is downwards
2. High base rate means asset prices will fall which reduces population wealth which reduces consumption which reduces demand which means domestic inflationary pressure is downwards
3. High base rate means high interest rates, which increase demand for pounds, SPECIE, imports increase, x-m gets worse, aggregate demand falls, and hence domestic inflationary pressure is downwards
4. High base rate means high interest rates, which increase demands for pounds, SPICEE, import prices rise, which directly raises CPI

Question 148

Define - Monetary Transmission Mechanism

Answer 148

The means by which interest rate changes have their effect on the macroeconomy

Question 149

Define - Traction

Answer 149

The extent to which other interest follow the Bank of England base rate

Question 150

Evaluate Monetary Policy (3 points)

Answer 150

1. If traction is weak then changes in the base rate won’t follow through into the market and hence subsequent effects on the macroeconomy won’t take place
2. If alternative determinants of investment are acting in the opposite direction, , even if interest rates were to be raised, investment increases would nullify the effect of investment (r against I, where I is downward sloping and while r increases, the I curve shifts outwards)
3. MPC suggest it takes 18 months for a change in the base rate to have a greater effect, suggesting time lag

Question 151

Define - Supply-Side Policy

Answer 151

Policy which aims to increase the productive capacity of the economy by increasing the stock of the factors of production or their productivity (AD-AS with AD and LRAS, where LRAS shifts outwards)

Question 152

Define - Red Tape

Answer 152

An idiom that refers to excessive regulation or rigid conformity to formal rules

Question 153

Give four global factors influencing UK’s low inflation rate

Answer 153

1. Rising productivity and cheap manufactured goods from China / Asia as a result of lower wages means lower inflation because cost of goods go down, which shifts out SRAS
2. Improved technology and working practices which have helped reduce costs which shifts out SRAS
3. Perhaps inflation targeting. e.g. Monetary policy geared towards keeping inflation low
4. Decreased inflation expectations making it easier to keep inflation low

Question 154

What shifts the SRAS and why is it upward sloping?

Answer 154

1. Costs
2. Resources and their productivity (because this alters costs)

It is upward sloping because in the short run some prices are sticky, however in the long run prices become more flexible

Question 155

What are two characteristics of inefficient taxes?

Answer 155

1. If supply is inelastic then when the tax is imposed output will fall minimally (if the tax is on a demerit good then this proves detrimental)
2. Resources firms expend to avoid tax and resources HRMC spend to catch them are wasteful, and hence complex taxes which can be avoided create issues

Question 156

Define - Direct Taxation

Answer 156

A tax levied directly on individuals or companies

Question 157

Define - Indirect Taxation

Answer 157

A tax (VAT) levied on goods or services

Question 158

Define - Progressive Taxation

Answer 158

A tax where as incomes increase, the proportional paid in tax increases

Question 159

Define - Proportional Taxation

Answer 159

A tax where as incomes increase, the proportion paid stays the same

Question 160

Define - Regressive Taxation

Answer 160

A tax where as income increases, the proportion paid falls (Indirect)

Question 161

Explain the Laffer Curve

Answer 161

As tax rates increase tax revenues increase, however economic activity is more and more discouraged and hence the rate of growth falls. After a point increasing tax rates reduces tax revenue because perhaps it is more effective to claim welfare benefits or perhaps it now becomes desirable for corporations to avoid tax (tax revenue against tax rate %, negative parabola)

Question 162

Define - Taxation War

Answer 162

In order to attract FDI flows country may engage in competing on basis of lower tax rates in order to encourage firms to set up there. This leads to globally low tax which damages each county’s reveues

Question 163

Which two taxes in the UK are regressive?

Answer 163

1. VAT and Excise duties as higher-income houses spend less of their income and save more than lower-income households. Hence they pay a lower proportion of their income in tax
2. Council tax - The highest council tax payer only pays a maximum three times that of the lowest council tax payer, but may earn much more

Question 164

Give two cases where taxes are beneficial

Answer 164

1. Taxation is always allocatively efficient in a perfectly competitive market and hence won’t damage this but still increases government revenues
2. Taxation in markets with negative externalities can improve allocative efficiency

Question 165

Give two cases where taxation is not beneficial

Answer 165

1. Taxation is distortionary and causes deadweight loss
2. Increasing taxation beyond a certain point may mean that it no longer becomes beneficial to work which means there is less labour with lower productivity

Question 166

Define - Horizontal Equity

Answer 166

individuals in the same financial circumstances have the same fundamental ability to pay taxes, and, therefore, should be taxed at the same rate

Question 167

Define - Vertical Equity

Answer 167

When individuals are in different circumstances and have different abilities to pay, they should not be taxed at the same rate

Question 168

Define - Welfare State

Answer 168

A system whereby the state undertakes to protect the health and well-being of its citizens, especially those in financial or social need, by means of grants, pensions, and other benefits

Question 169

Give two injections into a person’s ‘income flow’ which improve inequality

Answer 169

1. Cash/Welfare benefits (Pension, Grants etc…)

2. Free and subsidised healthcare and education

Question 170

Give two withdrawals from a person’s ‘income flow’ which improve inequality

Answer 170

1. Direct taxation

2. Indirect taxation

Question 171

Define - Non-contributory benefits

Answer 171

(Of a state benefit) not dependent on national insurance contributions

Question 172

Define - Contributory benefits

Answer 172

(Of a state benefit) dependent on national insurance contributions

Question 173

Define - Means tested benefits

Answer 173

Make (a state benefit) conditional on a means test

Question 174

Define - Universal benefits

Answer 174

A benefit which everyone is eligible to receive

Question 175

Give two disadvantages of the progressive tax and benefits system

Answer 175

1. It may create a disincentive effect, which occurs when individuals are discouraged from working hard because they pay more of their income in taxes.
2. It may create moral hazard, where some individuals may not look for ways to improve their own position because the state provides insurance against poverty, unemployment, and disability

Question 176

Define - Moral Hazard

Answer 176

The name given to the negative behaviour that can arise from an individual being insured

Question 177

Define - National Minimum Wage

Answer 177

The minimum pay per hour almost all workers are entitled to

Question 178

Define - National Living Wage

Answer 178

The minimum pay per hour all workers aged 25 or over and not in the first year of an apprenticeship are entitled to receive

Question 179

Give four policies the government can use to reduce unemployment and hence reduce inequality?

Answer 179

1. Government funded job creation schemes
2. Re-training schemes
3. Monetary stimulus
4. Fiscal stimulus

Question 180

Give three benefits to public expenditure

Answer 180

1. Higher allocative efficiency through provision of non-rivalrous and nonexcludable goods i.e. Armed Forces, Police and Criminal Justice System and provision of merit goods such as health, education and welfare
2. Government funds research and development which will increase dynamic efficiency through innovation
3. Some goods are best provided by monopolies, the lack of need to produce at profit max could make this more productively efficient

Question 181

Give two costs to public expenditure

Answer 181

1. Public sector may provide goods allocatively inefficiently
2. Public sector may provide goods productively inefficiently
3. Public sector may provide goods dynamically inefficiently

Question 182

Define - Accelerator Theory of Investment

Answer 182

An economic theory that suggests that as demand or income increases in an economy, so does the investment made by firms

Question 183

Give four characteristics of the Nordic Model

Answer 183

1. Universalist welfare state
2. Most labour being a part of a trade union
3. Low barriers to trade
4. Low levels of corruption

Question 184

How do low and high income countries different in terms of government spending and why?

Answer 184

1. Low-income countries have little tax revenues and hence government spending is also low
2. High-income countries typically demand more higher-quality goods from government provision

Question 185

Define - Cyclical Deficit

Answer 185

A deficit which occurs because government spending and revenues fluctuate through the trade cycle

Question 186

Define - Structural Deficit

Answer 186

The fiscal deficit which occurs when the cyclical deficit is lowest

Question 187

What is the effect of having a structural deficit?

Answer 187

If a government has one it is likely that the National Debt will grow over time because if the economy is in boom or recession it will still have to borrow money to finance its spending

Question 188

Define - Structural Balance

Answer 188

Occurs when at the peak of a boom, the actual fiscal balance is 0

Question 189

Define - Structural Surplus

Answer 189

Occurs when at the peak of a boom, the there is an actual fiscal surplus

Question 190

Give four factors influencing the size of fiscal deficits and hence nominal national debt

Answer 190

1. If it is a structural deficit caused by planned spending and tax decisions. It may increase in aboom as the government may believe the economy will continue to do well and hence borrow extra because they can
2. If it is a cyclical deficit then the severity of the recession will dictate how large the deficit is
3. Government have to deal with unforeseen events such as floods, natural disasters or the financial crisis
4. The larger the debt interest paid (debt interest is a part of a government fiscal deficit/surplus), the larger the deficit

Question 191

Give the two determinants of debt interest

Answer 191

1. Size of National debt, the amount government owers to its creditors
2. Rate of interest it has to pay on its debt

Question 192

Give two determinants of the rate of interest paid on new debt borrowing

Answer 192

1. The market rate of interest at the time

2. The credit rating of the government

Question 193

Give four implications of fiscal deficits

Answer 193

1. To borrow governments must crowd out the private sector through increasing the interest rate
2. High fiscal deficits may lower credit rating, however not always the case as US and UK have high deficits but have never defaulted
3. High fiscal deficits could prove burdensome for future generations to pay off, however national debt declines in relative value because of inflation which erodes the real value of debt
4. If a country has high deficits then it may be viewed that they could increase taxes to finance that, which discourages FDI

Question 194

Evaluate why the crowding out implication of a fiscal deficit may not happen (four points)

Answer 194

1. Government borrowing increase may be relatively small
2. Central banks may be operating QE which lets government borrow money at virtually 0% interest
3. May borrow on international financial markets instead of domestically
4. If it’s done in a recession private sector borrowing is likely to be falling anyway, lowering interest rates

Question 195

Give three ways the government can reduce fiscal deficits

Answer 195

1. Raise taxes
2. Lower government spending
3. Do nothing and wait for automatic stabilisers

Question 196

Define - Fiscal Deficit

Answer 196

When a government’s total expenditures exceed the revenue that it generates

Question 197

Define - National Debt

Answer 197

The total amount of money which a country’s government has borrowed (accumulation of yearly deficits)

Question 198

Give four ways to reduce the National Debt

Answer 198

1. Having a fiscal surplus
2. Inflation reduces real value of debt
3. More QE will reduce interest rate and hence reduce national debt held outside central bank
4. Governments can default on National Debt

Question 199

Give two responses of a government to an oil price crisis

Answer 199

1. Increase AD to get economy back to full employment but bear the burden of inflation and the implication this will have on labour pushing for higher wages
2. Decrease AD to stabilise prices at their previous level how experience unemployment

Question 200

Give four benefits to aid

Answer 200

1. Help overcome savings gap
2. Build capital stock by subsidising investment
3. If spent on education and health builds human capital and raises productivity
4. High growth and trade spillovers

Question 201

Give four costs to aid

Answer 201

1. Aid could be expropriated due to corruption
2. Politicians pay more attention to aid donors than to their citizens
3. Aid dependency: A dependency might be generated
4. Food aid could distort markets and result in loss of economic efficiency

Question 202

Define - Aid Paradox

Answer 202

Aid tends to be most effective where it is needed least

Question 203

Give four benefits to debt relief as a way to promote growth and development

Answer 203

1. Allows countries to use funds that would have been spent on debt servicing on investment instead or reducing poverty
2. Debt cancellation can be tied to conditions used to encourage development
3. Breaking the cycle of debt (where countries take out more loans to pay off debt, accumulating more debt)
4. May benefit developed nations through larger export markets being available

Question 204

Give four costs to debt relief

Answer 204

1. Debt cancellation may encourage irresponsible borrowing in the belief that further debt will not have to be repaid
2. It costs the firms and governments in the developed world to whom which the money was owed
3. Poverty (especially relative) should be tackled in one’s own country before resources are diverted away to help in others
4. In the long term export markets may prove too competitive with the developed world, acting as unwelcomed competition to their previously monopoly power in manufacturing exports

Question 205

Define - HIPC

Answer 205

Heavily Indebted Poor Countries Initiative launched in 1996 to provide debt relief with the aim of either cancelling debt or reducing it to sustainable levels

Question 206

Give two benefits to investment in health and education as a way to promote growth and development

Answer 206

1. Improvements in Health and Education are ends in themselves. Health is central to well-being and education is essential for a satisfying and rewarding life
2. Improvement in health and education increase productivity of the workforce which results in further growth

Question 207

Define - MPI

Answer 207

An international measure of acute poverty covering over 100 developing countries using 10 indicators in health, education and living standards - Higher it is the worse the poverty

Question 208

Define - The Genuine Progress Indicator

Answer 208

A measure designed to take fuller account of the well-being of a nation, only a part of which pertains to the health of the nation’s economy, by incorporating environmental and social factors which are not measured by GDP

Question 209

Why do institutions affect economics development? (3 points)

Answer 209

1. They ensure the enforcement of property rights
2. They keep transaction costs to a minimum
3. They prevent coercion

Question 210

Evaluate the effect of institutions on economic development

Answer 210

1. While good institutions facilitate development it may rather be the cause that development brings about good institutions

Question 211

Give four reasons why a functioning financial system (equal as well as efficient) is important?

Answer 211

1. Generate and distribute information
2. Match savers with borrowers
3. Allocate credit efficiently
4. Makes it easier to sell assets and thus increases liquidity

Question 212

Define - Development Banks

Answer 212

Public and private financial institutions that supply medium-and long-term funds for the creation or expansion of industrial enterprises raising capital from two major sources, bilateral and multilateral loans from USAID or World Bank and loans from their own governments

Question 213

Give four benefits to microfinance institutions as a method to promote growth and development

Answer 213

1. The group lending model where groups join together create joint liability and increase the chance of repayment
2. Many MFI’s focus on broader social objectives, such as education
3. NGO MFI’s target female borrowers, targeting gender equality in itself
4. Provide funds for the very poorest which formal institutions might not do, relieving poverty

Question 214

Evaluate microfinance institutions (4 points)

Answer 214

1. MFI’s provide funds to microenterprises, however many would just prefer employment
2. Few micro entreprises actually grow into anything large
3. Funds spent on microfinance mean less funds available for other development projects
4. Not a substitute for broader formal finance reform

Question 215

Give two reasons why infrastructure investment promotes growth and development

Answer 215

1. Improved labour mobility

2. Acts as investment in capital which can lead to capital accumulation or capital productivity which can drive growth

Question 216

Give four benefits of agricultural reform

Answer 216

1. Improving the state of private ownership gives farmers an incentive to be productive and maximise output on their land, increasing total agricultural output
2. Diversification into mixed farming where stable crops are combined with cash crops lessens the problem of underemployment
3. Diversification into mixed farming can also have the benefit of increasing revenues and profits, giving a single farmer enough to make small innovations
4. Increasing credit and information farmers receive allow them to be aware of new techniques and ways of replicating them, improving productivity

Question 217

Evaluate the benefits of agricultural reform

Answer 217

1. Farmers may be risk averse and hence oppose change

2. Governments may bow to political pressures from powerful landowning groups and fail to implement reforms

Question 218

Give two benefits to industrialization as a way to promote growth and development

Answer 218

1. Helps primary product dependent countries diversify their economy and hence rid of the problems associated with PPD
2. Industry being able to get cheap labour from agriculture means that they can make profits and reinvest which increases capital accumulation

Question 219

Define - The Lewis Model

Answer 219

A model which explains the growth of a developing economy in terms of a labour transition between two sectors, the capitalist sector and the subsistence sector

Question 220

Explain the Lewis model

Answer 220

To begin with everyone is employed in agriculture, which is dominated by family farms where they share income. Thus there are members of said family who have a marginal product of zero. This means that labour can be removed from agriculture and given to industry without a fall in the production in agriculture. Assuming it produces something, output increases. This wage will be cheap (less than MPL in industry) so firms will make profit which it invests and therefore capital is accumulated

Question 221

Define - Labour-saving capital

Answer 221

Capital which reduces the human input into the production process

Question 222

Define - Labour-using capital

Answer 222

Capital which increases human input into the production process

Question 223

Define - Schumacher’s concept of intermediate technology

Answer 223

In this theory he suggests that there is a stage between highly industrialized nations and nations rife with unemployment and an agricultural base which employs intermediate technology that is simple, easy to set up, less dependent on raw materials and more affordable

Question 224

Evaluate Industrialisation (4 points)

Answer 224

1. Lewis model assumes profit made in industry is reinvested. However this could be repatriated
2. Urban infrastructure will become pressured and labour would need training before entering industry
3. Cultural costs which could arise owing to a change in the system (free market system used in the industrialization process)
4. Lewis Model assumes surplus labour. If agricultural productivity is low and the government pushes industrialization this will lead to food shortages

Question 225

Give four benefits to Tourism as a way to promote growth and development

Answer 225

1. The biggest assets of developing countries are their environment and cultures. Tourism generates revenue from these assets
2. Modern communication devices such as the internet have made it possible to promote tourist destinations relatively cheaply
3. Tourism generates many employment opportunities for unskilled labour
4. Tourism creates injections into the circular flow of income from two sources. These are, firstly, the expenditure of the tourists themselves and, secondly, foreign direct investment (i.e. investment by multinational hotel chains)

Question 226

Evaluate tourism as a way to promote growth and development

Answer 226

1. FDI and infrastructure developments could lead to environmental damage
2. Air and noise pollution from construction or high flight volumes
3. Local cultures may suffer due to commercialisation.
4. Opportunity cost of diverting resources away from other areas of the economy

Question 227

Give four barriers which prevent the growth of tourism

Answer 227

1. Climate
2. Lack of infrastructure or transportation links
3. Lack of suitable labour with language skills
4. Conflict, including civil wars

Question 228

Define - Import Substitution

Answer 228

A deliberate effort to replace consumer imports by promoting the emergence and expansion of domestic industries

Question 229

Define - Export Promotion

Answer 229

Governmental efforts to expand the volume of a country’s exports through increasing export incentives, decreasing disincentives and other means in order to generate more foreign exchange and improve the current account of its balance of payments or achieve other objectives

Question 230

Give four benefits of Fairtrade as a way to promote growth and development

Answer 230

1. Higher prices for producers limits monopsony power to suppress prices and hence improves living standards of those producers
2. Long-term contracts signed by fair trade retailers ensure less price volatility
3. Producers get premiums which they can invest in development
4. Producers are required to improve the working conditions and product quality

Question 231

Evaluate Fairtrade (3 points)

Answer 231

1. By raising the supply of produce the retailer encourages greater supply of produce of which there is already excess
2. Downward pressure on prices could simply be a result of market forces
3. Protectionism in the developed world needs to be reduced instead

Question 232

Give four benefits to FDI as a means to promote growth and development

Answer 232

1. FDI fills the resource gap between targeted or desired investment and locally mobilized savings
2. Exporting MNCs improve the balance of trade and fill Fx gap
3. MNCs provide employment
4. The profits of MNCs can be taxed

Question 233

Evaluate the benefits to FDI as a means to promote growth and development (4 points)

Answer 233

1. Profits may be repatriated
2. Effect on balance of trade limited given MNCs import intermediate products and capital goods
3. MNCs could avoid tax and developing countries could have a taxation war to encourage them to go there
4. Capital-intensive production technologies create little employment. And they could exacerbate income inequalities through promoting interests of a small number of relatively well-paid workers

Question 234

Give four benefits to population limitation as a method to promote growth and development

Answer 234

1. Family planning and education programmes can lead to knowledgeable reduction in growth without the government having to actively limit growth using crude methods
2. High reduction of maternity benefits reduces population while also reducing public expenditure
3. Fine for high numbers of children could bring in extra revenue to subsidize the cost of high population
4. Policies to improve the economic status of women increase opportunity cost of having kids and is a development objective in itself

Question 235

Evaluate policies to restrict population growth (4 points)

Answer 235

1. Policies could be seen as too draconian and engender global disagreement/political tension/sanctions
2. Policies like family planning clinics cost more money, which could be used to have short term effects rather than waiting for long term
3. Internal opposition against increasing role of women in society
4. Policies may slow growth, but if issue is with current population levels then the country need to look for a way to cut population or increase food

Question 236

Give three ways in which developed countries cause issues in developing countries

Answer 236

1. Colonialism. Unequal distribution goes back to the time of colonies which were forced to concentrate on the primary production of goods
2. Inappropriate advice given to developing nations from developed economists
3. There are an elite in poor economies which benefit from the current system. The World Bank and IMF rewards them for keeping wages low and prices of raw materials low and discouraging diversification into developed industries

Question 237

Define - Zero-Sum Game

Answer 237

A situation in which each participant’s gain (or loss) of utility is exactly balanced by the losses (or gains) of the utility of the other participant(s)

Question 238

Why is it in global interest that developing countries escape poverty? (4 points)

Answer 238

1. Consumer in the global market grow, increasing export potential of developed nations
2. Further famine incidents will cause mass migration
3. Poor countries with poor governance have often proved to be breeding grounds for terrorism
4. Diseases created in developing countries could spread to developed economies

Question 239

Give four key elements of the Washington Consensus?

Answer 239

1. Deregulation
2. Trade regulation
3. Elimination of barriers to FDI
4. Tax reform, broadening of the tax base and cutting marginal tax rates

Question 240

Give two assumptions of the Washington Consensus?

Answer 240

1. Government intervention was more likely to make things worse than better
2. Poverty would be taken care of by growth and was not a major obstacle to growth and development

Question 241

Give four conditions imposed by the IMF

Answer 241

1. The reduction of protectionist barriers
2. The devaluation of the official exchange rate
3. Greater openness to foreign investment
4. Tight domestic fiscal and monetary policies

Question 242

Give three negative effects of IMF’s conditions

Answer 242

1. Tightening of policy lowers aggregate demand
2. Evidence suggests that the adjustments insisted on by the IMF hit poor families hardest
3. Firms in developing countries are likely to struggle to compete in international markets when protection is withdrawn

Question 243

Give four points discussed in the Doha Development Agenda

Answer 243

1. Reduction of tariffs in agriculture
2. Reduction of tariffs on industrial goods
3. An improvement of the dispute settlement mechanism
4. Ensuring that patent protection does not block developing countries’ access to affordable medicines

Question 244

Evaluate the Doha Development Agenda (3 points)

Answer 244

1. Removing patent protection limits investment in research to develop new medicines (which is why patents are given)
2. Patent removal is only effective if firms in developing countries can produce medicines
3. Future of Doha round as of late 2013 remains uncertain

Question 245

Define - ‘Ownership’ of Policy

Answer 245

Gathers that success is most likely if the free trade policy is owned by developing countries in the sense that it is introduced by them (With outside support as necessary), for their benefit, opposed to imposed from outside

Question 246

Define - EU

Answer 246

A political and economic union that consists of 28 member states between which there is free trade, freedom of movement of factors of production and common macroeconomic policy

Question 247

Give four costs to the UK leaving the EU

Answer 247

1. Subject to the CET and we export less to the EU which can lead to a decline in the current account
2. FDI is reduced (US firms looking for a gateway to Europe frequently set up in the UK)
3. UK lose out on trade deals EU are negotiating such as the Transatlantic Trade Partnership
4. Lack of free movement of capital and labour may increase employment gaps and reduce productivity growth

Question 248

Evaluate the four costs to the UK leaving the EU

Answer 248

1. If Marshall-Lerner doesn’t hold in the country the UK is exporting to, then their elasticity of demand for UK exports is likely to be inelastic, which suggests a change in price through tariffs won’t necessarily have the effect of reducing quantity demanded by a large amount
2. FDI isn’t a large portion of UK GDP in terms of net inflows and hence it is unlikely to impact that Uk extensively. Also foreign firms may be in the UK because of cultural similarities or the UK’s finance centre and hence won’t leave
3. UK could negotiate new trade deals with the developing economies such as BRIC and MINT countries
4. The UK could import more advanced capital from the US at a lower cost if we leave the EU, or cheaper capital from China and Japan

Question 249

Define - Flat Tax

Answer 249

A tax system, which refers to a tax on household income, taxes at a uniform rate, regardless of income level

Question 250

Give two benefits of a Flat Tax

Answer 250

1. Easily understandable

2. Everyone pays the same amount as a proportion of their income and hence this tax does not discriminate

Question 251

Give two costs of a Flat Tax

Answer 251

1. Poorer people after expenditure have less money to pay taxes etc compared to high income people
2. Government get less revenue from the progressive tax of high income earners which is much needed for government expenditure

Question 252

What are the four canons of taxation?

Answer 252

1. Timing of collection and amount should be clear and certain
2. Cost of collection should be low relative to yield
3. Means and timing should be convenient to the taxpayer
4. Levied according to ability to pay

Question 253

Define - PFI Contracts

Answer 253

Private finance initiative contracts are where a private company builds and operates a piece of infrastructure instead of the government

Question 254

Give and explain the two reasons why the aggregate supply curve is upward sloping?

Answer 254

1. Sticky costs meaning that even though price level increases, costs don’t increase and so the firm increases output
2. Price Illusion described a situation where there is imperfect knowledge and so nominal price increases are mistaken for being real price increases and so firms increase their output

Question 255

Give three examples of why there may be sticky costs in the short run?

Answer 255

1. Fixed contracts (i.e. labour)
2. Import price may be fixed due to the conditions of inflation in another country
3. Pre Purchased resources mean that as price of these goods increase they are not affected in terms of costs as they have already purchased their resources

Question 256

5 Mark Question Breakdown

Answer 256

3 (Knowledge) inc. Definition and Answer
2 (Application)

6 Minutes

Question 257

8 Mark Question Breakdown

Answer 257

6 (Analysis 2 points) (Or diagram 4 marks and 1 point of explanation)
2 (Application)

10 Minutes

Question 258

How many times should you use application per question in Section B?

Answer 258

2 times

Question 259

10 Mark Question Breakdown

Answer 259

4 (Analysis 3 Points)
2 (Application)
4 (Evaluation 3 Points)

12 Minutes

Question 260

12 Mark Question Breakdown

Answer 260

5 (Analysis 3 Points)
2 (Application)
5 (Evaluation 3 Points)

14 Minutes

Question 261

15 Mark Question Breakdown

Answer 261

7 (Analysis 3 Points)
2( Application)
6 (Evaluation 3 Points)

18 Minutes