Macroeconomics, part 10- The International Economy Flashcards
GDP definition:
The total value of outputs of goods and services produced within an economy in a given period of time
Short run economic growth definition:
Increase in the value of goods and services produced by an economy over a period of time.
Long run economic growth definition:
An increase in productive capacity of the economy from one year to the next
What is GNP?
GNP = GDP + net property income from abroad (NPIA)
Output produced by a country’s citizens, regardless of where the output is produced
Net property income from abroad definition:
Income flows (rent, wages, interest profit) earned in one country by someone in another country. e.g. renting out a property overseas
PPP definition:
Purchasing power parity. Measures how many units of one country’s currency are needed to buy exactly the same basket of goods and services as can be bought with a given amount of another country’s currency
What are the problems with using GDP per capita as in indicator of standard of living?
- Human happiness
- Non-market activities
- Environmental factors
- Informal economy
- Sustainability
- Balance of spending
Why doesn’t GDP per capita show human happiness?
National output might increase at the expense of leisure time, decreasing human happiness even though GDP is increased. Happiness is more than just the goods and services consumed
Why are non market activities a problem with GDP per capita?
There is no price attached to them, e.g. work of house wives/ husbands that would have a salary if it was paid for
Why are environmental factors a problem with GDP per capita?
- Environmental costs such as pollution would reduce the true value of GNP
- GDP includes work repairing harm, e.g. rebuilding an area after a natural disaster, creating a large GDP, but it would be better if that had never happend
Why is the shadow economy a problem with GDP per capita?
Particularly big in LEDCs with poor tax collection services. This makes their GDP seem lower that it actually is
Limitations of national income data:
- Each method of estimating GDP is imprecise, leading to inaccuracies in published figures
- Non market activities are not part of NY figures
- Undeclared economic activity
- Income is not distributed on a per capita basis
Benefits of economic growth:
- Higher living standards
- New jobs and decreased unemployment
- Increased tax revenue can fund public spending
- Improved business confidence which is attractive to foreign investment flows
- Higher consumption leads to induced increases in investment spending-
- Introduces new technology which spurs greater innovation
Risks from economic growth:
- Environmental impact
- Increased inequalities in income and wealth
- Resources are being depleted because of over consumption
How could economic growth potentially benefit the environment?
- Increased wealth could be used to buy cleaner fuels
- Resources to devote to research and development of cleaner and less resource-intensive production technologies
- Higher real incomes are associates with lower fertility rates which reduces the rate of population growth
- Change in structure of output away from traditional manufacturing industry
What economic things does the WTO do?
- Setting of tariffs
- Prohibition of manipulation of exchange rates
Why does the WTO prohibit the manipulation of exchange rates?
- By changing the exchange rate, it is interfering with another country’s level of AD
- It can cause another country to lose their comparative advantage
Quantitative controls for lending by banks:
- Reserve ratio
- Salary rules for mortgages
- Deposits %
- In the past, banks haven’t lent to people who were going to spend the money on imports
When does comparative advantage exist for a country?
- When the relative opportunity cost of production is lower than in another country
- A country is relatively more productively efficient than another
Why do different countries have different factors of production in different quantities and qualities?
- Weather
- Location/ geography
- Population
- Education levels
- Natural mineral deposits
What is what a country specialises in the production of due to?
The factor endowment in that country
What does a country specialising in the production of a particular good or service lead to?
- A surplus
- This then leads to trade of their surplus with another country’s surplus
Absolute advantage definition:
Being able to produce more of something than another country. Does not take costs into account
Weaknesses to the theory of comparative advantage:
- Assumes all factors of production are equally productive
- Assumes all factors of production can be easily switched from the production of one product to the production of another with no reductions in efficiency
- Assumes there is only one model of a product
- Doesn’t take into account transport costs
- Ignores fluctuations in the exchange rate
- Ignores barriers to trade
Types of exchange rate system:
- Free-floating
- Managed floating
- Semi-fixed
- Fully-fixed
- Monetary union with other countries
- Pegged
Managed floating system definition:
Exchange rate fluctuates from day to day but banks attempt to influence exchange rates by buying and selling currencies
Semi-fixed exchange rate system definition:
The exchange rate is allowed to fluctuate between a range before the central bank will intervene
Fully-fixed exchange rate system definition:
The government or central bank ties the official exchange rate to another
Pegged exchange rate system definition:
A currency is linked to a ‘basket’ of other countries, usually the main trading partners so that if their currency goes up, so does the currency in interest
Monetary union with other countries exchange rate system definition:
When countries share a common currency, Synchronises and manage each other’s monetary policy
Factors affecting the demand and supply of Sterling:
- Demand for UK goods and services (including tourism)
- Relative interest rates (hot money)
- Relative inflation
- Confidence/ uncertainty
- Speculation
- Government intervention
- FDI
Why is the J-curve a J shape?
- If the pound falls, prices of UK goods become cheaper overseas.
- Time delay before more UK goods are bought
- In the meantime, the BoP worsens because revenue falls as price in terms of foreign currency falls, and demand is price inelastic
- Once consumers start buying more UK goods because they’re relatively cheaper, revenue from UK goods will then increase, and the BoP will improve
Free trade definition:
International trade left to its natural course without tariffs, quotas or other restrictions
Protectionism:
The theory or practice of shielding a country’s domestic industries from foreign competition by taxing imports
Methods a government can use to reduce the balance of payments deficit:
- Devaluation of the currency
- Reduce AD using monetary or fiscal policy
- Protectionism
When is protectionism good?
- Infant / declining industries
- Balance of payments adjustment
- Response to ‘dumping’
- Employment protection
- Desire to increase government revenue
- Attempt to increase import substitution
What are the main method of trade barriers?
- Tariffs
- Quotas
- Subsidies for domestic firms
- Export subsidies
- Import licensing systems
Dumping definition:
- When a country exports a product for a lower price than it sells it for in its own country
- In the short term, consumers benefit from low cost goods
- In the longer term, the persistent undercutting of domestic firms will force the domestic industry out of business and allow the foreign firm to form a monopoly
Evaluation of different methods to reduce BoP deficit:
- Deficit isn’t necessarily bad. May mean there are many rich individuals who can afford luxuries from over seas
- Deficit may be sectorial. The UK has a deficit in goods but a surplus in services
- If the deficit is growing it may be more of a problem
- Devaluation of the currency: J curve, self correcting mechanism
- Demand management policies: Eval same a for normal fiscal/ monetary policy
Advantages of free trade:
- More choice
- Lower prices for domestic consumers, leading to a higher standard of living
Fragmentation definition:
Splitting up the production process where different parts of the production happen in different places. Each part happens where there is a comparative advantage for that process
Globalisation definition:
An increase in interconnectedness and interdependence of economic activity and social relations
Why are businesses the main driver of globalisation?
- TNCs want to increase profits, sales and shareholder value
- The barriers to international business are falling
- Governments want to encourage domestic businesses to expand (flows of profit into domestic economy)
Main gains from globalisation:
- Competitive markets reduce the scale of monopoly profits and incentivise businesses to innovate
- Enhanced growth has lead to an increase in average incomes and reduce extreme poverty. It has not helped to reduce the gap between the rich and the poor
- Freer movement of labour
Key drivers of globalisation:
- Containerisation
- Technological change
- Adjusting tax systems to encourage FDI
- Less protectionism
Disadvantages of globalisation:
- Rising inequality/ relative poverty
- Environmental degradation
- Macroeconomic fragility
- High structural unemployment
- Trade imbalances leading to protectionist tensions
Benefits of globalisation for the UK economy:
- Access to cheaper goods and services from emerging market countries leading to higher real incomes. Increased purchasing power
- Bigger export markets, increasing economies of scale
- More intense competition driving innovation and efficiency
Drawbacks of globalisation for the UK economy:
- Risks of increase in structural unemployment
- Environmental effect
- UK government has less control and the economy could become vulnerable to external shocks
Types of trading blocks:
- Free trade area
- Customs union
- Common market
Free trade area definition:
Free trade amongst member countries but have individual trade barriers with countries outside of the free trade area e.g. NAFTA
Customs union definition:
Free trade amongst member states and have common external traffis
Common market definition:
Free trade amongst member states, common external tariffs and free movement of people, e.g. EU
Trade creation definition:
When countries switch from buying goods from a high cost producer to a low cost producer. This is usually overseas goods. These goods become cheaper when countries join customs unions to remove tariffs. Trade is created
Trade diversion definition:
When countries switch from buying goods from a low cost producer to a high cost producer. After joining a trading block, common external tariffs can mean the goods that were previously cheaper, are now more expensive than substitute goods from within the trading block that are from a higher cost producer
